Snyder Q&A: First Half 2016 to be Hard on Oil, Gas

Rigzone: What do you expect for 2016?

Snyder: I think we’re looking at really a very hard first and second quarter. I think a lot of companies are going to be scrambling to sell, but no one wants to go to market with those numbers. Nobody wants to go to market because it’s so horrible out there today. They’re running out of money. And it’s just creating a lot of problems. Some service companies are just being liquidated. Look at Go-Frack and some others – there is no market for basic assets like extra trucks, extra pipe, extra fittings. The market is just not there, and they’re just going to liquidation. They can’t even sell them on the service side.

On the E&P side, you can always sell an E&P company. You may not like the price, but you can sell it.

On the whole, 2016 will be tougher on oil and gas because they’re just running out of money – they’re just running out of runway. A lot of these companies have fewer options to raise cash, and so they’re just running out of money. It’s a liquidity issue.

Rigzone: You’ve noted that North American production hasn’t dropped much. How is that the case when more rigs are laid down each week?

Snyder: In the Permian, you hear that they’re drilling into the core of the core of the core. You’re just drilling the very best of the best. All the new technologies are being used, and over half the rigs that are on the ground are never coming back. Everybody is using the best technology today, and their costs are down 30 percent. There’s almost 5,000 uncompleted wells out there that they can go in and drill laterals on; and there’s also the re-fracking of up to 10,000 wells. So our oil guys are very creative. The lifting costs – 15 to 20 bucks a barrel – if they can get a lateral well drilled and suck it out, they’re going to do it because they need the cash flow.

When [oil] hit $60 a barrel, everybody was ecstatic this summer. They were doing dances in the streets, and [thought] it was going to hit $70. I think at $70 everybody figures they’re going to be ok. A lot of people can make money to break even. The issue you’re going to have at the end of the day is sort of a reset on the smaller companies.

All the majors are cutting back their exploration, conserving cash, and some are looking at reducing dividends, so they’re going to make it through. These guys are sitting on tens of billions of dollars in cash.

Rigzone: What’s the outlook for smaller companies?

Snyder: What happened in the lower middle market and the smaller companies is there was a rush into the market with high yield debt several years ago and so a lot of these companies built their balance sheets off PUDs (proved undeveloped reserves). The PUD ratio is as high as five or six or 7 to 1, so the PUDs versus producing is a huge ratio. These guys raised a lot of money off of PUDs, but they can’t complete them because at $45, you can’t complete them – there’s not enough market value in them.

So you’ve got these companies with these giant balance sheets. [The majors] have billions of dollars of reserves they’re selling for tens of millions of dollars because of the ratio of producing to the PUD is out of line. So these companies raised hundreds of millions of dollars in the public markets on high yield, and it’s coming home to roost.

This whole idea of going to market, raising high yield debt, and pumping up your balance sheet with PUDs and not having as many producing assets is coming home to roost. You’ve got hundreds of billions of dollars of high yield debt out there at companies with very little or no cash flow. So I think there’s going to be a continued falling out, a continued filing [of bankruptcies], of these people with high yield debt and unsecured instruments that are going to get poured out.

And in the meantime, people are sitting on the sidelines waiting to come in and hoping for the bottom of the market because a lot of people got hurt badly when they rushed in at the end of last year, and the beginning of this year. A lot of people rushed in, got a nosebleed, and they’re sort of sitting it out right now.

Rigzone: When will things improve?

Snyder: When those three points converge … when the market value and the bid-ask come together. It hasn’t happened yet, and I don’t think it’s going to happen until the first quarter of next year.


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