Cash Is King: TPH Team Analyzes Credit Crunch In E&P Land

"Cash is king," shouts the E&P research team at Tudor, Pickering, Holt & Co. Securities Inc., who have been following the credit markets' affect on upstream producers daily. With liquidity tightening and fear the predominant emotion on Wall Street, "those companies with cash and solid balance sheets are moving into the catbird's seat and those that have firepower should outperform," they say. "There are going to be some great values on acquisitions." Following are some excerpts: The credit markets---"The commercial paper market liquidity has dried up and costs have tripled from  about 2% a few short months ago. Last week two investment grade E&P companies, Apache Corp. and EOG Resources, termed out their commercial paper exposure at costs significantly higher. Why would Apache raise $800 million and EOG raise $750 million at Libor + 310 bps compared to Apache's last bond offering at +68 bps and EOG at +148 bps? "Without commercial paper access the next source available was their last resort, the line of credit. If investment-grade companies are tight, we have to assume that smaller company reserve-based credit facilities are being tightened and rates are heading much higher. An informal poll of CFO’s says the checkbook is closed and has been for the last several weeks." Buyers market---"We anecdotally have heard of a couple asset transactions that did not close and we are closely watching one transaction in East Texas as an indicator of a large buyer in the Haynesville’s appetite to continue acquiring. While the credit markets tightened, the commodity strip fell, and buyers shifted from running a two-year strip and approximately $9 gas to a slightly lower strip and approximately $8 gas.  All this leads us to believe the companies trying to sell assets to fund drilling programs are going to have to make the tough decision of cutting Capex or accepting a lower price for their assets." Valuing E&P assets like acquirers---"Four short months ago, acquirers had to use effectively a two- to three-year strip for oil and gas and $100 per barrel oil and $9 per thousand cubic feet gas to secure a purchase. Today, an informal survey says buyers continue to use a two-year strip, but have dropped their longer-term oil price to $90 per barrel (+/- $5/barrel) and $8 per Mcf (+/- 50c/Mcf). "During the first six months of the year, the equity and debt markets were happily funding acreage acquisitions and pushing for faster organic developments via higher capital budgets. Times have changed. Now even investment grade companies are issuing debt at much higher rates. "Given this shift, the companies with cash, available credit, and free cash generating capacity have a great opportunity to snap up assets from those companies that are capital constrained. Those companies will have to reduce capex more toward internally-generated cash flow and any shortfalls will likely have to be made up via asset sales (into an increasingly buyers market)." Companies with the lowest risk and sitting pretty: Occidental Petroleum, Apache, Devon Energy, XTO Energy, Anadarko Petroleum Corp., Noble Energy, Plains Exploration & Production (tightening), EOG Resources, Petrohawk Energy (tightening) and Southwestern Energy. "These companies continue to offer the combination of value, growth and plenty of cash to fund their budgets." Companies that are skinny: Quicksilver Resources, Rex Energy Corp., Range Resource Corp., Brigham Exploration Co., Carrizo Oil & Gas, GMX Resources and Parallel Petroleum Corp. Companies that are tightening their belts: Chesapeake Energy, Exco Resources and Sandridge Energy. Interestingly, say the analysts, Chesapeake, Quicksilver, Exco, Range and Rex "all mentioned potentially selling assets." Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.A-Dcenter.com;  www.OilandGasInvestor.com; stoon@hartenergy.com