OIL

Price rally won't be enough to save some companies

While crude oil prices are on the rise, rising stockpiles and soft demand threaten to send them falling once again, keeping markets on edge.

If prices do plunge again, a large number of oil and gas companies may soon begin falling with them.

Overextended on debt and running out of options as they await an oil price rebound that has yet to come, many in the industry are preparing to throw in the towel. Creditworthiness is still deteriorating as executives desperately search for relief that has failed to arrive in time for dozens of peer companies that have already filed for bankruptcy.

The resilient Goodrich Petroleum Corp. may be next on the list. The leadership there has put up a fight to stay active in the oil price crash, but now the company says it's at the end of its rope. It needs shareholders to agree to a dilution of shares at a special meeting scheduled for Monday. The company hopes an agreed-to strategic fiscal restructuring will halve its debt burden.

Goodrich Petroleum says it won't make interest payments on debt this month. If shareholders reject the plan, then the firm will seek Chapter 11 bankruptcy protections, CEO Walter "Gil" Goodrich said yesterday.

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"In no way are we trying to threaten or coerce any stakeholder," Goodrich said in a call. "We are simply doing everything we can to ensure all of our stakeholders fully understand and appreciate the inevitable result if our proposed voluntary restructuring proposals are unsuccessful."

A market rally has sent crude oil prices back to the $40-per-barrel range, raising speculation that the bust is bottoming out. But oil inventories are also rising, despite predictions of stronger global crude demand in response to the lower prices.

The bust is now starting to hurt midstream pipeline companies. And bearishness in energy commodities is spreading. Analysts are starting to question the commercial viability of liquefied natural gas (LNG) export projects in the United States as Australia is set to emerge as a massive new LNG supplier this year.

The U.S. Energy Information Administration reported yesterday that the domestic oil production decline underway, though gradual, is holding. EIA says output is now sharply lower on a monthly basis from a year ago.

From a peak of around 9.7 million barrels per day in April 2014, experts estimate that the United States is now pumping closer to 9.3 million barrels per day.

EIA sees year-over-year declines for the first time in more than four years. "Oil production from tight formations accounted for most of the increase in U.S. oil production during the past five years, and it is now making up most of the decline in output," the agency said.

Alarm bells ring again over global economy

The International Energy Agency sees strong growth in crude oil demand occurring in 2016. But public economic indicators keep challenging this assertion.

Data published Tuesday show exports from China plunging in value last month. Commodities imports into China also fell. Decline in the same indicator was reported in January as well. The negative data points prompted the International Monetary Fund to issue another dire warning on the state of the world's economy.

The IMF has been sounding an alarm on the deterioration in global trade for months.

"Protracted low global demand and adverse feedback loops between the real economy and markets may generate additional deflationary pressures, putting us at risk of secular stagnation," said IMF's deputy managing director, David Lipton, during a speech before the National Association for Business Economics. "Labor supply and labor productivity growth have fallen considerably over the past decade, further aggravating these adverse dynamics."

Companies expecting a demand boost to save them this year should lower their expectations, Leonardo Maugeri of Harvard University's Belfer Center for Science and International Affairs argued in a February assessment. He estimated that the global oil supply-demand gap stood at about 3.5 million barrels a day, with the excess production flying into inventories worldwide.

"While many companies and countries announced cuts to their spending budgets, very few actually halted investments already underway in the upstream sector," Maugeri explained. Thus "production capacity and the supply of oil will continue to grow."

The Boston Consulting Group characterizes the current downturn as "a structural -- rather than cyclical -- crisis" affecting big oil companies. Companies are tooled to replace reserves and grow production, but now they must hold in place as they slash costs and try to get operational expenses down quickly.

Some companies are faring better than others. Goodrich was once seen on that list.

Yesterday executives at W&T Offshore Inc. told shareholders and analysts that they are holding their own so far but plan on deep spending cuts for 2016. W&T turned in its full-year 2015 financial results this week.

Cost cutting in the industry has helped, but what W&T really needs to stay afloat is a rebound in the oil price, said CEO Tracy Krohn. "The cost of goods and services have fallen dramatically but still don't match the 70 percent decline we've seen in crude oil prices."

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