Analysis: Natgas writedowns signal bank squeeze on spending

Fri Aug 17, 2012 3:14pm EDT
 
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By Matt Daily and Braden Reddall

(Reuters) - Huge writedowns on natural gas fields point to cuts to come in oil and gas producers' reserves from untapped fields at the end of this year, which will constrain their ability to borrow and may herald more asset sales.

Bank loans are a lifeline for the many smaller U.S. exploration and production (E&P) companies that rely on debt to cover their drilling costs.

Several indebted producers, under pressure from low gas prices, took writedowns on the value of gas still underground because prices are down by a third from last year.

Ultra Petroleum Corp UPL.N took a writedown of $1.1 billion, or equivalent to a third of its stock market valuation, while Quicksilver Resources Inc KWK.N took an impairment just shy of $1 billion.

A $429 million writedown for Exco Resources Inc (XCO.N: Quote) was accompanied by the Dallas company cutting 140 of its 1,092 workers plus about 160 contractors.

"In any industry, you never want to see this, but you have to recognize that the world has changed for domestic natural gas pricing," said Eric Gordon of Brown Advisory in Baltimore, which manages $29 billion, with about one-eighth of that in energy.

Most E&P companies tend to outspend their cash flows even when they post profits, buying new fields and investing in new wells to increase output, a key metric for stock market investors.

To fund all that, they rely on debt or new equity issuances, but both of those can be difficult to access when reserves drop.   Continued...