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A year seems long ago and far away for the oil and gas industry, which enters 2017 upbeat — a mood as different from last year’s doldrums as oil and water.
This time in 2016, the price of oil hit its dismal bottom of $26 per barrel as companies shed more workers and parked idle equipment in storage yards.
Since May, companies have been hauling that equipment from storage yards and putting it back to work, nearly doubling the number active drilling rigs that punctuate the sky like exclamation marks. Oil has been recovering too, and since early December has stayed above $50 per barrel — a price that while not robust, is enough to send more crews back to work in the oil field. Texas energy industry groups have declared the bust, which started mid-2014, a thing of the past.
“This is the moment we’ve been waiting for,” says Karr Ingham, an economist who tracks an index for the Texas Alliance of Energy Producers.
The recovery has helped fuel a flurry of deals, mergers and acquisitions in U.S. shale fields, where horizontal drilling is combined with hydraulic fracturing, the process of using massive amounts of water, sand and chemicals pumped at high pressure to crack open tight rocks. Shale boomed for years, but busted in 2014, and deals slowed to a trickle.
Accounting and consulting firm PwC tracked $21 billion in shale deals last year, a 166 percent increase over the prior year.
The Permian Basin in West Texas and eastern New Mexico led the way, with 24 deals worth $13.8 billion.
“West Texas is clearly the area that’s drawing the most attention,” said Doug Meier, who heads PwC’s deals practice in Houston.
It was followed by the Marcellus, a vast natural gas field centered in Pennsylvania, where there were 13 deals worth $6.8 billion.
In South Texas’ Eagle Ford Shale, a 400-mile oil field, there were nine deals worth $2.4 billion, according to the PwC report.
The Haynesville, a shale gas field in Louisiana and East Texas, had been nearly silent in terms of deals — no transactions in 2012, one each in 2013 and 2014. But interest picked up in 2015, with three deals, and in 2016, with six deals, Meier said.
“Confidence is much higher in the marketplace,” Meier said. “We’re entering 2017 in a much better environment for the industry.”
The pain hasn’t quite ended, though.
The law firm Haynes and Boone has tracked 114 bankruptcies filed by North American oil and gas companies since 2015, and another 110 bankruptcies by oil field service companies since 2015.
Meier said the pace of bankruptcy and restructuring has declined, but isn’t done.
“Are we out of the woods yet?” Meier asked. “There still will be restructuring and bankruptcies occurring.”
Basil Karampelas, managing director in consulting firm BDO USA’s restructuring and turnaround practice, said that large firms with access to lenders and the latest technology will thrive, but smaller, privately managed firms may still face financial distress. “For them, the outlook is not as rosy,” Karampelas said.
Brad Ross, transaction advisory services managing director at BDO, said most lenders have been willing to restructure debt.
“The banks just don’t want to own these assets,” Ross said. “They had tremendous exposure to (exploration and production companies). They were looking for a friendly exit.”
Karampelas said one looming issue is that many operators hedged oil at higher prices — they get paid that amount no matter the fluctuations of daily oil prices. By June 30, most of the hedges will roll off.
“Your air cover is then gone,” Karampelas said.
There are unknowns, too. Oil rallied after the Organization of the Petroleum Exporting Countries agreed in late November to cut its production by 1.2 million barrels a day, the first reduction by the cartel since 2008, but both Ross and Karampelas noted that the cartel has a history of out-producing its quotas.
Still, the mood is optimistic. A BDO report called 2016 the toughest year of the downturn, with oil prices reaching their lowest point since 2003, but said confidence has returned to the industry this year. A survey of energy firm financial officers said they expect a healthy level of deals in 2017, which may taper toward the end of the year.
So far this year, deals in the Eagle Ford include Denver-based SM Energy Co. selling some of its Eagle Ford assets for $800 million to the privately held Venado Oil and Gas of Austin, an affiliate of the private equity firm KKR.
Anadarko Petroleum Corp. announced it would exit the Eagle Ford and sell its acreage to Houston’s Sanchez Energy Corp. and Blackstone Group LP in a $2.3 billion deal. The sale covers 318,000 total acres in Dimmit, Webb, La Salle and Maverick counties, which Sanchez has nicknamed “Comanche.”
In the Permian Basin, Noble Energy announced it would acquire Permian Basin workhorse Clayton Williams Energy for $2.7 billion.
Parsley Energy said it had added another 23,000 acres in the Permian Basin at a price of $607 million.
In addition to deal making, companies are starting to spend more on things such as drilling and fracking to bring new wells into production, and on well service and maintenance of their existing wells.
Consulting firm Wood Mackenzie expects companies to spend $61 billion in U.S. shale fields this year, which would be an increase of 23 percent over last year.
“They’re starting to put cash back to work,” Clay Lightfoot, a Houston-based analyst at the firm. “It’s mostly flowing to the Permian Basin, but there’s still opportunity in the Eagle Ford.”
Last week, the number of drilling rigs at work in the Eagle Ford Shale in South Texas reached 61, more than doubling its low of 29 in May, according to a count by service giant Baker Hughes.
In the Permian Basin, there were 303 rigs at work, up from a low of 134 last April.
The number of active drilling rigs hunting oil or gas in the U.S. bottomed in May at 404 but reached 751 last week — the highest number since November 2015.
Ken Medlock at Rice University’s Baker Institute, expects to see prices moving toward $65 per barrel.
That price forecast and the return of drilling rigs has trickled down to recent and soon-to-be graduates hunting for corporate jobs. “We see this with our students, too,” Medlock said. “Companies are starting to post jobs again.”
jhiller@express-news.net
Twitter: @Jennifer_Hiller
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