Oil, gas companies drill deeper into debt

Oil and natural-gas company Anadarko Petroleum Corp., Weld County’s No. 1 oil producer, also takes the top spot in another category: its total long-term debt.

Anadarko (NYSE: APC), a company based in The Woodlands, Texas, that drills oil and natural-gas wells in Weld, accumulated $15.1 billion in debt by the end of last year from $12.7 billion just four years earlier.

Debt loads at major producers in Northern Colorado, along with those nationwide, have soared during the past five years, raising concerns about a prolonged price drop for oil and the effect on local economies should some of the players cradle under the load.

Andrew Byrne, director of North American exploration and production research for Englewood-based analyst firm IHS, said oil production has continued to increase despite a decline in the number of rigs exploring for oil and natural gas in the United States. While production will drop in the second half of this year because of a lag effect, companies still must drill and produce oil at some level to pay interest on their debt.

“Companies need to reinvest in order to pay those interest expenses,” Byrne said. “A lot of balance sheets of companies are coming under stress. If you spend too much, then you have to increase debt.”

Much of Anadarko’s debt stems from a $4.05 billion lawsuit settlement related to pollution caused by spinoff Tronox Ltd. and another $4 billion payment to BP to settle claims associated with the 2010 Gulf of Mexico oil spill. The remaining debt has funded billions in capital investments in Northern Colorado’s prolific Wattenberg oil field.

Anadarko’s borrowing comes as West Texas Intermediate crude spot prices have fallen to the mid-$50-per-barrel range from highs exceeding $100 last summer. Responding to the market downturn, Anadarko has cut its capital spending by 33 percent to no more than $5.8 billion companywide. In the Wattenberg, the company plans a 20 percent capital spending reduction to $1.8 billion from $2.2 billion.

Other oil companies operating in Northern Colorado also have accumulated debt since 2010, a year after the onset of the region’s shale oil boom when Denver-based EOG Resources Inc. (NYSE: EOG) drilled the prolific well known as “Jake.”

If oil prices stay low for several years, companies with sizable debts could be in trouble, said David Beard, managing director of energy equity research for Iberia Capital Partners in New Orleans. Oil companies have to pay back banks first, leaving less money for drilling and leading to less production.

“Banks come first, but you have to keep drilling to keep production up,” he said. “That’s where companies can get in trouble.”

“Debt does take money away from these guys, you can’t deny that,” he added. “That’s part of why you’re seeing such a dramatic cutback in drilling.”

At $6.2 billion, Houston-based Noble Energy Inc. (NYSE: NBL), Weld’s No. 2 oil producer, has nearly three times the debt compared with its $2.3 billion in 2010. Another company operating in Northern Colorado, Houston-based Carrizo Oil & Gas (Nasdaq: CRZO), has more than doubled its debt to $1.4 billion from $558.3 million in 2010. Denver-based PDC Energy Inc. (Nasdaq: PDCE) has debt of $664.9 million, up from $280.7 million.

Platteville-based Synergy Resources Corp. (NYSE MKT: SYRG) had no debt at the end of fiscal 2010. The company had $146 million in debt at the end of February, although it also had $218 million in cash and equivalents.

If Synergy paid off its debt, it would have $72 million in cash, said Jon Kruljac, vice president of capital markets and investor relations for Synergy.

“If we elected, we could pay our debt and still have cash,” he said.

Companies have continued to spend to keep production flowing and make debt-service payments, said James Sullivan, vice president and senior analyst for Alembic Global Advisors in New York City.

“It’s not necessarily that you want to grow at any price, but these are declining assets if you don’t feed them cash,” said Sullivan, who covers Anadarko. “You don’t want to get to the point where your debt load is mismatched to your base of production: It’s not great to have declining volumes.”

Anadarko, for one, has debt-service payments of approximately $800 million annually, so it must keep production flowing at a reasonable rate to generate income to do so, he said.

Anadarko spokeswoman Robin Olsen said the company has a strong cash position with more than $2 billion in cash on hand and access to ample liquidity.

“This gives us high confidence in our capital structure,” she said, “as we focus on preserving that financial strength in the current commodity-price environment.”

Analysts are wary of the rising debt loads.

A number of companies have sought equity through secondary offerings to pay down debt and fund spending programs, Byrne said. But if companies overspend, they risk default.

“If the industry comes under stress and they default on their debt, what is the impact to regional banks and people who are holding that debt?” he said. Additionally, “Certain areas are going to be seeing a dramatic decrease in taxes from the oil and gas industry. … So it has a ripple effect on the economy.”

The company with the greatest debt, Anadarko, has upcoming senior debt maturities including $1.75 billion in 2016 and $2 billion in 2017, according to investment firm Morningstar. Anadarko received a –BBB credit rating from Morningstar, meaning the firm believes the oil company is a moderate default risk. The credit rating was improved from its previous rating of BB+, an above average default risk.

Steve Lynn can be reached at 970-232-3147, 303-630-1968 or slynn@bizwestmedia.com. Follow him on Twitter at @SteveLynnBW.

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