We've all been scratching our heads when it comes to figuring out what the ultimate effect the Wall Street meltdown/bailout will have on the oil industry, as crude prices have jerked around wildly over the last week. But short-term fluctuations aside, the ongoing credit crunch may also have serious long-term structural impacts on the industry. According to a report in the Wall Street Journal last Friday, a faltering economy and tougher access to credit may lead smaller oil and gas companies to be gobbled up by the Exxon/BP/Shell giants:
Many companies focused on drilling in North America for natural gas have for years spent more cash than they generate, issuing equity and taking on debt to keep up their torrid pace of drilling. Questions are growing about whether these companies will have to cut capital spending in coming weeks or face a rising cost of borrowing in the face of declining commodity prices.
For some, merely cutting back spending may not be enough. Many smaller companies have bought drilling rights to tens of thousands of acres of land, and now must find the cash to drill hundreds of wells at a time when bank lenders are closing their windows. "Companies have reached beyond their comfort level, and there have to be some consequences," Jefferies & Co. analyst Subash Chandra said.
Looks like Big Oil might just get bigger.
--James Martin