Spending cuts, tough times ahead for U.S., Arkansas energy sector

A top Wall Street analyst said Thursday that Southwestern Energy Inc.’s succession plan that swept oil industry veteran Bill Way into the company’s CEO chair was well executed, but warned that the Houston-based oil driller with Arkansas roots faces tough times ahead.

On Wednesday (Jan. 6), Southwestern’s board of director’s appointed Way the company’s new president and CEO, replacing longtime executive Steve Mueller who surprisingly stepped down amid the yearlong collapse in crude oil and natural gas prices.

Fadel Gheit, managing director and senior oil and gas analyst at New York City-based Oppenheimer & Co., cheered Way’s promotion, saying “succession was well planned and went very smoothly.” However, the respected Wall Street analyst noted that Way will have little time to celebrate in his new position, given the brutal environment for any energy stocks tied to the price of oil and gas.

“The industry outlook is dire and the company financial position is very constrained,” Gheit said of Southwestern’s balance sheet. “All energy companies are making tough decision in a difficult industry environment and SWN is no different.”

$4 BILLION DEBT BURDEN
Already, Southwestern has had to make adjusted in its existing revolving credit facility to improve the company’s liquidity and pay off mounting debt. A week before Thanksgiving, the Houston-based oil and gas driller entered into a $750 million three-year term loan agreement to meet its current obligations, worsened by the company’s $5.4 billion purchase of gas-and-oil assets in Pennsylvania’s Marcellus Shale from rival Chesapeake Energy in late 2014.

“We are pleased with the strong support from our banks in moving $750 million of our existing debt to the term loan and increasing our liquidity,” former CEO Steve Mueller said of the company’s new credit line on Nov. 17. “We are committed to creating long-term value to our shareholders. The actions announced today reflect sound financial policies that are aligned with this commitment. We also remain committed to a flexible capital program that is responsive to the commodity price environment and anticipate outstanding debt to remain flat or decline throughout 2016.”

Mueller’s hope that the company’s debt stays flat in 2016 may be far-fetched, given recent crude oil and natural gas forecasts for 2016 and beyond. In trading Thursday on the New York Mercantile Exchange, West Texas Intermediate crude for February delivery fell 70 cents to $33.27 per barrel.

OIL, NATURAL GAS PRICE DILEMMA
Wall Street giant Goldman Sachs recently predicted after OPEC held off cutting back on production that oil prices in 2016 could bottom out at $20 a barrel. Goldman also lowered its 2016 forecast for WTI, the premium U.S. benchmark, to $45 a barrel, down 21% from the investment bank’s prediction of $57 a barrel six months ago.

Even the industry’s more conservative forecasts, including the most recent short-term outlook from the U.S. Energy Information Administration, sees 2016 as a down year for oil and gas. EIA’s most recent forecast predicts WTI crude oil prices average $51 per barrel in 2016.

 The outlook for natural gas prices is not much better. Monthly average Henry Hub spot prices are expected to average $2.88 per million British thermal units (MMBtu) in 2016. That price would be a substantial improvement on current market prices, which closed today on NYMEX at $2.32 per MMBtu.

Already, Southwestern has essentially mothballed most of its natural gas production, due to natural gas prices that slumped below $2 only a few weeks ago. That caused Southwestern to take its remaining two operating rigs in the Fayetteville Shale off line until the price of natural gas sufficiently rebounds, company officials.

 And with the company’s growing debt load and cash flow problems due to the lack of production in the company’s Fayetteville and Marcellus shale plays, some analyst and investors are expressing fears of bankruptcy or dilution of the company’s shares over the next 12 months. Those fears, however, may be premature given Southwestern’s $4 billion-plus long-term debt doesn’t come due until 2018, and crude oil and gas prices could turnaround as quickly as they have collapse in the past year.

Gheit and other Wall Street analysts are most anxious to hear how Southwestern will respond to oil and gas price woes. On Thursday, Southwestern Energy spokeswoman Christina Fowler said the company will likely not issue its 2016 capital guidance until the end of this month or early February, about a month later than usual.

A year ago, when oil and gas prices were about $50 a barrel and $3.50 per MMBtu , respectively, Southwestern said it planned to spend $2.6 billion in fiscal 2015, and would follow that up with capital plans of $2.9 billion and $3.6 billion in 2016 and 2017. Those 2015 capital plans were later revised to $2 billion in late February, under the scenario of natural gas at $3.25 per thousand cubic feet (Mcf) and crude prices at $60 a barrel on NYMEX.

FAYETTEVILLE SHALE WOES
In the Fayetteville Shale play, Southwestern invested $944 million in the Arkansas development in 2014. In 2015, that investment was down to only $560 million just months after the company completed its blockbuster multibillion dollar deal with Chesapeake and promoted Way to president of the company at the end of 2014.

At the end of the third quarter of 2015, the last time Southwestern reported is capital spending levels, the company had expended $1.4 billion through the first nine months the year and had $4.7 billion in long-term debt. The year-end totals for the fourth quarter and fiscal 2015 are not in yet, but several analysts are predicting last year’s budget will come in under $2 billion with long-term debt around $4.4 billion or more.

At the company’s celebration of its first decade in the Fayetteville Shale in October 2014, company officials said the company had invested more than $10 billion in the Arkansas shale play since 2004. At the time, there were more than 1,500 employees across north central Arkansas focused on the development of the company’s 905,684 net acres in the unconventional shale play.

Although he is more bullish than some other analysts who cover Southwestern and the oil sector, Gheit still fears that 2016 for the Fayetteville Shale leader will be difficult. The Oppenheimer analysts said he expects major cuts in capital spending and operational expenses, which for most oil and gas firms facing similar circumstances in the past six months means substantial job losses.

“Capital spending and operating expenses must be cut further, while well productivity and capital efficiency must improve to survive the current industry downturn, which no one knows when or by how much it will improve,” Gheit said.

He added: “(Southwestern) must plan for the worst and hope for the best.”