Nathan Bomey, and Roger Yu

USA TODAY

The 21st century version of the American gold rush is coming to a swift end.

A shakeout is sweeping through the U.S. oil and gas business, putting small-time petroleum prospectors who got rich off of shale energy out of business as rock-bottom oil prices reshape the sector despite the commodity's slight uptick in recent weeks.

The pain low oil prices have sparked has spread into other corners of the energy industry. This week, coal miner Peabody Energy warned that it may have to file for bankruptcy protection and SunEdison, a developer, installer and operator of alternative energy plants said it discovered problems in its accounting processes, the latest in a string of troubles for the company.

Oil closes above $40 for first time since Dec.

Workers in the industry are feeling the brunt. Oil and gas companies worldwide have publicly announced plans to cut more than 319,000 jobs since late 2014, according to Houston energy consultancy Graves & Co., which tracks layoffs. Among them are large companies such as Baker Hughes, Halliburton and Weatherford International that supply services and equipment to drillers. The bad news is hitting smaller, lesser-known companies such Golden State Drilling, a driller in Bakersfield, Calif. which laid off 104 workers in December, according to government documents.

“When you can’t drill, the money dries up, so we’re seeing a huge amount of fallout,” said Lisa Donahue, chief of the restructuring and turnaround business at AlixPartners. “We’re going to see a lot of bankruptcies and consolidation.”

The shift bears a striking resemblance to the evolution of the gold rush in the mid-1800s, when many individual gold seekers got rich quick but then gave way to well-capitalized companies that industrialized the process.

At least 48 North American oil and gas companies — pummeled as they pay for land rights that they can't make money on because of low oil prices — have filed for bankruptcy since the start of 2015, according to a February report by law firm Haynes and Boone. That’s up from eight oil and gas bankruptcies in 2014, according to New Generation Research.

In North Dakota, for example, where the oil rush fueled an economic development boom over the last decade, state economists are projecting a 32.6% decline in mining, quarrying, and oil and gas extraction jobs from 2015 through 2017, falling to 17,846 positions, according to a February 2016 report.

As wells go dormant, a trickle-down effect sets in as E&P companies stop spending on equipment and other oilfield services. Exploration and production companies slashed capital expenditures by 50% in 2015 and are projected to slash them by another 50% in 2016, said Dan Katzenberg, senior analyst for Robert W. Baird & Co.

“Smaller companies that don’t have great efficiencies in scale will be squeezed out of the business — particularly if they are in a high-cost area,” said Ronald Silverman, a bankruptcy attorney for Hogan Lovells.

Shale oil and gas producers had flourished since the early 2000s, powered at first by new technology that allowed them to access additional reserves and then powered by near-zero interest rates that enabled quick investments.

The U.S. oil industry has added about 4 million barrels of supply per day in shale production since the start of the boom, according to Robert W. Baird & Co. That's a nearly 80% increase from production levels in 2006, according to the U.S. Energy Information Administration.

Yet the oil and gas companies that plumbed the new reserves are becoming a victim of their own success as fossil fuels flood the market and broader, global factors wreck the conventional wisdom that insatiable demand will prop up prices. Awash in supply, oil prices are down more than 60% over the last two years, having briefly plunged below $30 per barrel earlier this year.

In the world of conventional oil, which is dominated by large global corporations and state-run companies, upfront investments run into the billions of dollars.

But in the world of independent energy producers — which average 14 employees per company according to the Independent Petroleum Association of America's 2012-13 report — millions will do the trick. That’s why small companies dominated shale in the early going.

“You and I could go and get a rig off of eBay this afternoon,” BP chief economist Spencer Dale said, assuming “one of us has a rich uncle,” and “we wouldn’t need enormous sums of money to go out and start drilling oil. We could start drilling oil in a month or two.”

But the era of “mom-and-pops” fueling the shale-oil boom is likely coming to a close, Dale suggested. The small-time entrepreneurs scoured the country for new sources of oil, effectively serving as scouts and launching early operations.

“What’s different in shale is that rather than eight or nine companies, there are four or five hundred. It’s completely different,” he said. “Does it end up looking exactly like conventional oil or do the different characteristics mean it’s likely to be less concentrated? I think there’s good reasons why it could end up being less concentrated.”

Low prices pain for some, gain for others

Coupled with stubbornly high production among the Organization of the Petroleum Exporting Countries and the swooning of China’s economy, the resulting global glut of oil is emerging as a complex economic puzzle.

A long-held belief is that low energy prices are generally a net positive element in the everyday lives of consumers and companies. The money not spent on oil and gas can be used by consumers to buy other goods or for savings, while companies can pad their bottom lines or expand into new areas.

But a chorus of skeptics is becoming increasingly voluble as the oil-dependent states in the U.S. — which generate a greater portion of energy consumed by Americans than ever before — bleed jobs and suffer revenue losses owing to numerous bankruptcies and oil rig shutdowns.

Ratings firm Moody’s said March 2 that its “liquidity-stress index” for oil and gas companies had hit an all-time high, surpassing the low previously seen in the wake of the global financial crisis in 2009.

To be sure, there is plenty of evidence to show that falling energy prices — absent other factors — are adding cash to family budgets. U.S. households had about $700 extra in 2015 as a result of lower gasoline prices, according to the U.S. Energy Information Administration.

Heating bills — as measured by the average price of No. 2 fuel oil, the most commonly used heating oil in the U.S. — tumbled about 26% in 2015, according to the EIA. After adjusting for inflation, the national average for domestic airline fares fell to $370.74 in the third quarter of 2015, a four-year low and down 6.3% from a year-ago period, says the Transportation Department’s Bureau of Transportation Statistics. Jet fuel is airlines' biggest expense item and lower fuel prices generally mean lower fares.

Low energy prices are “a benefit that’s distributed broadly through the economy,” said Tom Sanzillo, director of finance at the Institute for Energy Economics & Financial Analysis. “They use resources for other things. It’s almost a wage increase. That’s a fundamentally important — its stimulus effect in the economy.”

The traditional rule of thumb is that a sustained 50% lower crude oil price typically raises the growth rate by about 1 percentage point, according to research by the Federal Reserve Bank of Dallas last year. But given the increased domestic production of oil and more efficient use of it, the traditional rule of thumb should probably be halved, it said. “The reduction should boost U.S. growth 0.5 percentage point for a year or so,” the bank said.

Now, evidence is piling up for the glass-half-empty side of the argument, heralded by those who fear that low energy prices created by the U.S. boom is having an unwanted effect.

Consumers kept about 20% of savings from low energy prices instead of plunging it back into the economy, according to the J.P. Morgan Chase Institute. While the economists at JPMorgan Chase are cautiously optimistic that increased consumer purchasing power will provide a healthy boost to GDP growth, they point out that consumer spending has been more muted than expected. If spending does not take off, “the negative impact on the losers from the fall in oil prices may rise exponentially compared to the gain from the winners,” they wrote.

The precipitous drop in oil imports also has dramatically strengthened the dollar, said Dale, the BP economist. That has made it more difficult for American manufacturers to compete with low-cost overseas producers.

Right before the boom started, the U.S. trade deficit was about 5.8% of GDP in 2006, according to the Federal Reserve Bank of St. Louis. But that fell to 3% in 2015, according to the U.S. Department of Commerce.

The industry’s profound downturn also has sapped the economic vitality of certain regions, namely the eight oil-and-gas producing states: Texas, Oklahoma, Wyoming, Louisiana, North Dakota, Alaska, New Mexico and West Virginia.

Jobless claims from the sector have risen sharply in these states, though more economically diversified states, like Texas, have fared better than others.

In November, Shongaloo, La., resident Clint Benefield, 40, lost his San Antonio-based job doing environmental work at oil drilling sites in November after 22 years in the business.

Benefield, who invested his life savings in starting an e-cigarette store after losing his job, said energy companies binged on shale investments and are paying the price.

“Well, you got all these investors up top that are wanting to get fat really, really quick,” he said. “Then all of a sudden they get bloated and they can’t eat anymore. That’s kind of what happened. These investors got fat.”

The pain is felt among suppliers and service firms as well. Halliburton, which gets a large portion of its revenue from E&P companies, swung from a $5.1 billion operating profit in 2014 to a $165 million operating loss in 2015 as total revenue declined 28% to $23.6 billion. The company recently announced plans to shed 5,000 jobs, about 8% of its global workforce.

Still, the world’s biggest oil companies are positioned to ride out the downturn better than small companies that are facing dwindling revenue.

“It’s the smaller operations with large amounts of debt,” said George Washington University professor Hossein Askari, an expert on the oil industry. “They took on too much debt. Any of the major companies that have large oil and gas shale production — they will just sit on it.”

E&P companies are finding it “very difficult to justify the cost of new drilling, so they’re burning through cash” for the right to lease property in hopes of a future price turnaround, said Fred Sosnick, leader of law firm Shearman & Sterling’s restructuring and insolvency group.

Meanwhile, small companies that seek to stick around are finding that raising capital is a lot more costly. In the first phase of the oil and gas boom, small companies thrived for a very specific reason. They could deploy resources quickly to hidden crevices throughout the country to extract oil and gas.

But now, they’re paying interest rates ranging from about 7% to 8%, compared to larger companies that are doing deals at 2% to 3%, Katzenberg said. The higher rates reflect the market’s lack of confidence in the smaller companies’ viability.

As cheaper assets of bankrupt drillers become available, consolidators — like Mark Papa — could go shopping. Papa, former CEO of shale giant EOG who played a critical role in leading the shale boom, recently joined a private-equity firm that raised $450 million through an initial public offering Feb. 24 to acquire distressed energy assets, envisioning a sweeping wave of consolidation.

“I would predict in the next six to 12 months you’re going to see a decimation of (the shale gas and shale oil) industry, just companies and bodies all over the place there,” Papa told the IHS CeraWeek conference in Houston on Feb. 23.

Also scouring for cheaper opportunities will be big oil companies and freshly capitalized investment firms that are poised to pounce on acquisition opportunities. “You’re getting a lot of consolidation in this sector, which you can argue is beneficial long term,” said Frank Wolak, energy economics professor at Stanford University. “In early days, anyone got into the business. It was almost like gold rush.”

Still, Wolak and many other economists aren’t ready to concede that the fallout from the industry shakeout will outweigh the more visceral benefits of low energy prices.

“To me, it’s very hard to argue that, all of sudden, you can get an item for cheaper prices and you’re not better off,” Wolak said. “It’s extremely challenging, if not impossible, to assess the impact on the global economy of the low price of oil. It’s an extremely difficult calculation.”

Contributing: Benjamin F. Mitchell

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