The small oil and gas companies that account for most US production are still under pressure, regardless of how good the price of oil looks compared to a few months ago. That is because most of their business is in natural gas, and the curiously low price of natural gas makes it more expensive to drill than not.
Barclays Capital Research noted in a new report that it was but one year ago that natural gas was flying high, closing above $13.50/MMBtu in early July. Now, natural gas prices are closer to the $3.50 level.
The American Petroleum Institute said in a report this week that natural gas domestic drilling was down 43 per cent in the second quarter of 2009 from the year-earlier quarter – the most severe quarterly decline this decade. And API is not the only one publishing dour numbers.
Baker Hughes said the overall US rig count for June 2009 was 895, down 23 from the 918 counted in May 2009 and down 1,006 from the 1,901 counted in June 2008.
The worry has been that if production falls off too sharply, then it will be hard to ramp it up to meet domestic demand once the economy turns around. While that is true, the issue for the US’ small oil and gas companies might go beyond moving fast enough. A number of them might not even still be in existence by the time the rebound comes. To hang onto their businesses, some of these companies began laying off staff a few months ago, as they cut back on drilling and tried to just hold their businesses together.
But that was a few months ago. The time when they will have to choose between filing for bankruptcy protection or selling their businesses outright cannot be far off. Indeed, earlier this year there were a string of companies forced into untenable situations. The continued drop in drilling indicates this list will certainly grow before natural gas prices recover.
Related links:
Small oil objects to big tax clawbacks (FT Energy Source, 08/05/09)
Halliburton, small oil and picking up bargains (FT Energy Source, 21/04/09)
