In many ways, the country's exploration and production companies have been their own worst enemies.
New technology and improved drilling techniques quickly allowed the industry to tap vast natural gas supplies throughout the county, flooding the market and destroying prices.
“Too much of a good thing is a bad thing,” said Fadel Gheit, an industry analyst with Oppenheimer in New York. “Too much oversupply of natural gas has depressed natural gas prices.”
In response, the industry is going through a transformation as natural gas companies try to reinvent themselves as oil
The companies have used a variety of methods and have experienced differing results.
SandRidge Energy Inc.
One of the earliest and most radical transformations in recent years is that of Oklahoma City-based SandRidge Energy Inc.
The company was born in 2006 as a natural gas company. Just two years later, SandRidge executives began changing its
In 2008, natural gas represented 90 percent of SandRidge's revenue. In 2012, the company expects 85 percent of its revenues to come from oil.
To make the transition, SandRidge sold off natural gas producing assets, gobbled up oil companies and oil and natural gas liquids-rich properties and piled on billions of dollars in debt.
“It's fair to say that SandRidge had more debt on its balance sheet than it would have preferred to have in 2010 and 2011,” said Kevin White, senior vice president of business development at SandRidge.
But the company has largely completed its transition into an oil company and now is experiencing much larger revenues as a result, he said.
“On a relative basis, our debt level is in a much better place today than it was a year ago, not that we have paid off that debt, but because our earnings power is increasing so dramatically,” White said.
One common way of measuring debt is by looking at total debt as a ratio to earnings before interest, taxes depreciation and amortization, or EBITDA. SandRidge's debt ratio was 3.2 as of the end of 2011. The company's February purchase of Dynamic Offshore Resources drops the ratio below 3.
“We're comfortable with that number,” White said.
While SandRidge carries more debt than many of its peers, it also works hard to minimize risk, using hedges to lock in a guaranteed price or price range for most of its production.
“Throughout the history of the company, SandRidge has been one of the most actively hedged,” White said.
Chesapeake Energy Corp.
Across town, Chesapeake
The company is trying to transform an asset portfolio it built over more than 20 years into one of the largest natural gas
Chesapeake executives have said the company should complete its transition to oil and natural gas liquids by 2014. To pay for the transformation, the company has taken on billions of dollars of debt and plans to sell $9.5 billion to $11 billion in assets throughout the rest of the year.
“The payoff for this corporate transition we have under way should be increasingly clear for all to see in our liquids production growth over the next year and into the years ahead,” CEO Aubrey McClendon said last month on the company's
McClendon pointed out that Chesapeake plans to grow its oil and natural gas liquids production from 30,000 barrels per day at the end of 2009 to 200,000 barrels per day in 2014.
“We believe this could turn out to be the best liquids volume growth story in the U.S. industry and, perhaps, one of the best in the world as well,” McClendon said.
Analysts for S&P and Bernstein Research this month said that if the company does not sell assets and pay down debt within a year, its debt-to-earnings ratio could exceed 4.0, which would trigger a default on some of its loans.
McClendon said the company has had strong interest in the properties it is selling.
“We've had to limit the number of people who can come through our data room to a
Devon Energy Corp.
The process of refocusing on oil has not been as dramatic at every company.
Devon Energy Corp. has adjusted its drilling and exploration budgets within its existing set of properties.
“We never wanted to be just a natural gas company or just an oil company because the two commodities both fluctuate a lot in terms of prices,” CEO John Richels said. “We always thought having a good mix of oil and gas provided a better balance and would create a better return for our shareholders over time.”
While Devon has moved its focus predominantly to oil properties, it is keeping the natural gas assets in its mix.
“When natural gas prices change or when industry conditions change or when oil prices change, we'll have the ability to go back into some of those gassy areas and put more emphasis on gas,” Richels said. “That puts us in a great position to adjust our operations based on market conditions from time to time.”
Devon has changed its focus to oil largely without taking on debt. The company has one of the lowest debt ratios in the industry and one of the highest levels of cash on hand.
Devon's debt-to-EBITDA ratio is about 1.4. When the company's more than $7 billion in cash is included, the ratio drops to 0.6.
Continental Resources Inc.
The newest Oklahoma City energy company has been
“A few years back, nobody talked about oil,” CEO Harold Hamm said. “It was disparaged in favor of wind and natural gas. But we knew oil was extremely important to our industry.”
Continental also has one of the lowest debt levels in the industry, in part because it didn't have to change its focus quickly and in part because of the company's long-standing philosophy on debt.
“Oil and gas prices spike and drop regularly,” said John Hart, Continental's senior vice president, chief financial officer and treasurer. “If you have a large amount of debt, you can find yourself upside down quickly.”
Different is good
While companies have vary
“A lot of that is based on the different personalities of the management teams. Some people are risk-takers. Others are more conservative,” Agee said.
“Debt can be an issue, but it can also be an opportunity,” he said.