A $110 billion bill looming for oil service companies

The oil service companies that employ the bulk of Houston's energy workers are heading for a $110 billion wall of debt - and there's little chance lenders will save them before they hit it.

That's the bill for all the cash banks and investors have pumped into a U.S. shale drilling bonanza that turned into a financial nightmare when crude prices collapsed two years ago and have so far bankrupted 83 oil-equipment suppliers and 90 energy producers across North America.

The debt is coming due over the next five years, with payments ratcheting up sharply in 2018, said Moody's Investors Service in a new report Tuesday.

Unless both crude prices and oil explorers recover quickly from a tumultuous two-year downturn, many of the service companies could fail, and the ones that don't could be weighed down by debt payments for years.

"It's unsustainable," said Bill Herbert, an analyst at Simmons & Co. in Houston. "The oil field service industry is effectively earning negative cash margins. The balance sheets are swollen with way too much debt."

Moody's said one-third of the 67 oil field service companies on its list could see debt levels climb to 10 times their raw earnings, which are calculated, for accounting purposes, before adding in taxes, interest payments, and other things that affect a company's bottom line. That would leave them far more vulnerable to debt default or a restructuring.

10 times the pain

Several Houston service companies, including Atwood Oceanics, Stallion Oilfield Holdings and GulfMark Offshore, could have 10 times more debt to raw earnings as soon as this year, the credit ratings agency said.

Stallion Oilfield Holding and GulfMark Offshore did not immediately respond to requests for comment. Mark Smith, chief financial officer for Atwood Oceanics, said lenders agreed in March they wouldn't require the company to stay within a certain threshold of debt to raw earnings. The company in recent months also reduced its debt levels by buying back bonds at a discount through open-market repurchases and other means.

About $33 billion of the debt from bonds and revolving credit lines will come due by 2018. Moody's said it doesn't expect oil field service companies to begin a recovery before the middle of next year. "Many do not have the liquidity to wait for a market recovery as the wave of maturities intensifies in 2018," Moody's analysts said in the report.

It's a bleak outlook for an industry that has already been left in tatters by an oil bust that began in June 2014, when prices began falling from more than $100 a barrel. Once, when drillers were riding high on expensive oil, at least 10 companies could boast of a significant presence in the U.S. oil tools market. Now, that has been reduced to about five, and only two have worldwide reach, Herbert said.

The four biggest service companies, Schlumberger, Halliburton, Baker Hughes and Weatherford International, have cut more than 150,000 workers combined, in an effort to cut costs out of drilling work. All the industry pain is a consequence of the 30 percent price concessions oil producers forced service companies to give up after crude prices collapsed. They're not earning enough from cheaper contracts.

"If the oil service industry isn't allowed to earn an adequate rate of return, then U.S. production isn't going to grow quickly," Herbert said.

Bailouts unlikely

Some of the financial fallout could be avoided if lenders decide to bail out the service companies. But several banks have signaled they're pulling away from the energy business, and that the shale industry will have to prove it can be profitable again before they return.

"Banks just aren't lending to energy companies, period," said Marshall Adkins, an oil field services analyst at Raymond James in Houston. "Not even to the guys with good balance sheets."

The same applies, he added, for private equity firms, which usually pour cash into mergers and acquisitions when an industry implodes. Those investors haven't been eager to back big deals because the banks they usually team up with aren't ready after getting burned in the oil bust.

In the boom years, "there was excessive optimism," said Vladimir Jelisavcic, chief investment officer at Bowery Investment Management. "We're in the process of de-leveraging. For the foreseeable future, there will be more conservatism across the board."

That contraction in energy lending is likely to hamper early efforts to bring the industry back into growth.

"You'll see a dropoff in the major projects," said David McGuire, president and chief lending officer of Spirit of Texas Bank in Houston. "We're just in a funk. We're waiting to see if the ground is firm."