Tough choices loom for oil, gas companies

Crude collapse spreads pain throughout industry

There has been much discussion of late on how weakened oil prices are challenging companies in the energy industry. Many companies are now exploring strategies to cut investments and costs while also streamlining operations.

BHP Billiton, the world's largest miner, announced Wednesday that it would slash investments in shale drilling and reduce its number of drilling rigs in operation by 40 percent. According to BHP, the company moved quickly in response to falling crude prices and expects its revised program to benefit from drilling improvements.

Weeks earlier, Helmerich & Payne (HP), one of the world's largest contract drilling companies, announced that it would halt production at 50 rigs, in addition to the 11 rigs it had already idled.

Meanwhile, French oil and gas giant Total also announced Wednesday that it would cut capital spending on its North Sea fields as well as on US shale production.

While big name companies like BHP, HP and Total have the assets and the financial wherewithal to ride out the current storm, their smaller peers in the energy sector may not be so lucky. With crude prices still in a funk, successful efforts to diversify and restructure could make the difference between survival and bankruptcy.

Earlier this month,?WBH Energy, a small-scale shale oil and gas firm based in Texas, filed for bankruptcy protection. This bust may mark the first of its kind caused by sliding global oil prices. The company is reportedly between $10 and $50 million in debt to creditors who have refused to keep lending to the struggling outfit.

Financial reality doesn't seem to be in the favor of oil and gas producers. According to information from FactSet, analysts expect energy sector components in the S&P 500 to see a 19.1 percent annual decline in earnings during the fourth quarter - revised substantially from the 8.1 percent growth previously predicted.

The rapid development of the US's shale energy industry has also led to a boom in oil exploration and production. But with global crude prices going off a cliff in mid-2014, investors have taken a much dimmer view of the industry. In fact, in early November, the International Energy Agency reportedly predicted that declining oil prices could cut investment in US shale companies by 10 percent in 2015.

According to some observers, it's only a matter of time before risks in the energy sector start to really turning the screws. Within the industry, toughening times may lead to further defaults.

During the height of the US energy boom, local oil and gas companies went heavily into debt, with borrowing jumping by 55 percent since 2010 to $200 billion, The Wall Street Journal reported in early January.

When prices were riding high, companies scrambled to finance new wells and operational expansion. The banks and investors who supplied them with funding may now be ready to call in their debts - or, at the very least, cut off financial support. Banking industry insiders have already told the media on several occasions that the energy industry is headed toward a slowdown in loan creation.

For heavily indebted energy companies, layoffs and capital spending cuts could offer hope for long-term survival if current conditions persist. Right now, a sharp rebound in oil prices appears highly unlikely given signs of widespread weakness in the global economy.

Energy firms which are feeling the pressure now should brace for a long-term period of thinned demand and limited price growth. Moving forward, their priority should be updating their businesses, cutting costs and accommodating themselves to a more challenging market climate.