Revenue Hit, Bankruptcies In Play With Plummeting Oil Prices

Mar 9, 2020

WTI Crude pricing falling 20 percent since Friday, March 6.
Credit oilprice.com

Oil prices fell 25 percent today in their steepest drop since 1991. The record stumble raises concerns of lasting impacts to Wyoming's revenue picture and energy producers in the state.

"Nothing like this has ever happened before this fast and this far," said Carl Larry, market development performance director at Refinitiv, a financial consulting firm.

He said the last major drop in oil pricing was in 2015, but there was more warning. Larry said COVID-19 has led to an unprecedented drop in demand in just a month while a price war between Russia and Saudi Arabia this weekend pushed the decline into further depths. Saudi Arabian leaders chose to increase supply despite demand plummeting worldwide.

"Right now, we're looking at issues that don't seem like they're going to be resolved and might be even getting worse. And to make a move like this right now, it's inconceivable," Larry said.

An $130.8 Million Hit

In 2019, Wyoming collected about 20 percent of its taxes from oil alone. On the Senate floor, Eli Bebout, chairman of the Senate Appropriations committee, explained that means a price drop doesn't bode well for Wyoming.

For every dollar a barrel of oil drops in price, Wyoming's budget takes a $12.5 million impact, Bebout said.

"Sort of the sad thing about this is we're still so dependent on minerals. Here we go, you can just see the impact of a hiccup over the weekend, what it does to our budgets," he said.

On Friday, the WTI oil price sat at $41.28/barrel. Prices now sit at $30.82/barrel. That's a $130.8 million financial hit for the state at 1:43 pm.

Pete Obermueller, president of the Petroleum Association of Wyoming, said the state is particularly relying on oil right now with depressed pricing in natural gas and production drop-off in coal.

Riverton Sen. Eli Bebout
Credit wyoleg.gov

"With this double hit of demand reduction and supply increases, this is frightening for Wyoming's revenue picture," he said.

Threat of Defaults

Several major financial firms including Wood Mackenzie and Morgan Stanley warn that sustained pricing below $40/barrel could trigger steep cost-cutting and potential bankruptcies for over-leveraged, or debt-ridden, companies.

"Discretionary spending would be slashed, including buybacks and exploration. But given the lack of excess in the system, the cuts to development activity will be necessarily fast and brutal," said Fraser McKay in a press release, head of Wood Mackenzie's upstream analysis.

Morgan Stanley found energy company defaults could outnumber the peak in 2016, the last significant downturn in oil prices; it began in 2015.

The firm put Oklahoma-based Chesapeake Energy at the highest level of default risk within the year, mentioning Occidental Petroleum could also see its bonds downgraded which could lead to mass selling.

"The price collapse could be the trigger for a new phase of deep industry restructuring - one that rivals the changes seen in the late-1990s," said Tom Ellacott, vice president of the stockbroker's corporate research team.

Chesapeake Energy in particular has been in the spotlight in the past few months with $9 billion in principal debt, nearing debt payment deadlines, and a lack of cash flow. The company has operations in the Powder River Basin.

Pete Obermueller, president of the Petroleum Association of Wyoming, said Wyoming companies have varying degrees of financial security right now, but that the breakeven price is around $59/barrel on average here.

For right now, companies are playing the wait and see game and there are no immediate plans for price-cutting or shutdowns, he said.

"If it lasts for, you know, weeks, then absolutely, they'll have to make moves," Obermueller said.

Larry expects depressed pricing to last six weeks on the short end, but said he anticipates closer to three months.

Have a question about this story? Contact the reporter, Cooper McKim, at cmckim5@uwyo.edu.