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Slump in Oil Prices Brings Pressure, and Investment Opportunity

Screen Shot 2015-01-13 at 09.23.28An article by Michael Corkery and Peter Eavis published 2 Feb 2015 by The New York Times under the headline: 

“Slump in Oil Prices Brings Pressure, and Investment Opportunity”

American history is littered with oil busts that created big winners and losers.

Now, as the cracks appear in the latest energy boom, the forces of failure and opportunity are stirring again. Resolute Energy, a Colorado company that borrowed big in the boom, is among those in an endgame that is being played up and down Wall Street and in the vast oil fields that new drilling methods have opened in recent years.

It is a struggle that could take place at scores of other companies, leading to thousands of layoffs, as well as losses for banks and investors. At the same time, new fortunes stand to be made.

When Resolute set out three years ago to buy thousands of acres in the oil patch of West Texas, lenders showered the company with hundreds of millions of dollars. But the company had little expertise in the costly and complicated horizontal drilling that it employed on its new property.

Such easy money has abruptly come to an end, mostly because oil prices have plunged, potentially making life much harder for companies like Resolute. Banks slashed the size of the company’s credit line late last year and imposed new lending conditions. Its stock has ​plummeted, and now trades for mere pennies.

The sudden drop in oil prices, incited by fears of a global supply glut and waning demand, caught the oil industry and its lenders by surprise. Many companies, which only a few months ago were the toast of the high-yield debt and initial public offering markets, suddenly cannot raise additional equity or sell bonds. A few lenders have started reining in bank lines and more are expected to tighten loan terms in the coming months.

“If you give an oil guy a dollar, he’s going to use it to drill,” said H. B. Juengling, a vice president of investor relations at Resolute. “But the available funding is starting to close down.”

The longer prices stay low, the less financial sense it makes to keep drilling.

FULL ARTICLE

RELATED NEW YORK TIMES ARTICLE

Lower Oil Prices Strike at Heart of Canada’s Oil Sands Production

Extract

Canada’s oil sands — and the 167 billion barrels of reserves — prompted an unprecedented expansion over the last decade. But the roughly $155 billion spending spree left the industry with unusually high production costs. Now, oil sands operators are scrambling to limit the damage, as crude prices hover near seven-year lows.

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