Bracing for 15% cap-ex cut

Tight capital markets and slumping commodity prices are starting to leave their mark on North American oil and gas companies, with U.S. investment bank Barclays Capital predicting a 15 percent cut in exploration and production spending across the continent in 2009.

A Canadian investment dealer, Peters & Co., said some junior upstream companies are up against shrinking credit lines, compromising their access to capital, further cutting into capital spending plans for next year.

In a research note to investors, Barclays said it has reversed its earlier predictions of a spending increase across North America next year.

“Lower natural gas prices due to supply growth, budget cuts, pressure on cash flows, credit market issues and concerns about demand growth have led us to revise our forecast,” said analysts James Crandell and James West.

The bank said investors should now expect Canadian producers to trim 15 percent off their E&P spending based on its forecast prices of US$7 per thousand cubic feet for gas and US$75 per barrel for oil.

Barclays said budget cuts will flow through to many oilfield service and drilling companies, particularly those oriented to the North American gas market.

A Peters & Co. report said junior companies that “will be at or close to their credit lines exiting the year may be hard pressed to have their lines increase or to raise capital in the current market environment.”

“With the drastic decline in equity prices, many ... intermediate and junior entities will be challenged to raise equity and may have to restrict spending in late 2008 and 2009.”

In a year-end debt comparison, the firm identified Birchcliff Energy, Ember Resources, Iteration Energy, Monterey Exploration, Peyton Energy Trust and Storm Exploration as companies expected to have less than 10 percent remaining on their existing credit facilities at the end of 2008.

“These entities will either attempt to raise equity, seek expansion or current debt facilities or restrict spending,” the report said, estimating that the peer group will have drawn at least 70 percent of its credit lines by year’s end.

Those with credit may cut deals with cash-strapped peers

Those with unused room on their credit facilities may attempt to strike deals with their cash-strapped peers, Peters & Co. said, naming Baytex, NuVista, Vermillion and Zargon as having the strong financial base to “take advantage of such targets.”

Tristone Capital said companies with low debt to cash flow and ample room on their credit lines have a chance to pick off weaker companies at depressed prices during the downturn.

Don Rawson, Tristone’s director of institutional research, said that strong hedging programs can shield companies during a time of declining commodity prices by supporting both capital programs and acquisitions of weaker companies.

He estimated that at best only 15 percent of volumes by junior producers would be hedged to this point of 2009.

At the upper end, concerns about plans for oil sands megaprojects are building as crude prices shrink, posing challenges for developers to find cash to cover even the smallest outlays.

Michael Tims, chairman of Peters & Co., said the best prospect for moving ahead rests with multinationals, such as the joint venture Kearl lake project by sister companies, Imperial Oil and ExxonMobil.

He doubted companies would cut back a long-term project unless they “no longer like the relationship between capital costs and the commodity price.”

Sales to meet margin calls

He said in a statement he was “very disappointed” to have been required to “involuntarily” sell the shares because of the “unprecedented deterioration in capital markets triggered by the worldwide credit and ensuing financial crisis.”

Shares in Connacher dropped 12 percent earlier in October after the company said it was shelving a planned expansion of its Montana refinery.

But Gusella said his confidence in Connacher is “undiminished,” adding he expects to add to his holdings as “circumstances permit.”

He said the principal downside of his action is that it “takes away the ability to recover the substantial value in the marketplace that is now being recognized in relation to the true value of the company.”

Gusella said he had also unloaded a “significant percentage” of his shares in Petrolifera Petroleum, which operates in South America, to meet margin calls.

—Gary Park