Oil, Gas May ‘Slingshot’ Up After Credit Freezes Rigs

The credit crunch will keep U.S. oil and gas producers from ramping up exploration they do through drillers such as Nabors Industries Ltd., setting the stage for shortages and surging prices when demand recovers.

Chesapeake Energy Corp. and Carrizo Oil & Gas Inc. are among producers spending no more than their cash flow after a collapse in credit markets drove up debt costs. That means they won’t hire the likes of Nabors and Rowan Cos. to drill more wells in anticipation of higher prices. Producers cut capital budgets 17 percent this year after demand slowed and prices plunged, according to Tristone Capital Inc.

“Quite frankly, they don’t have the credit, which exacerbates the problem that their revenue stream is far below the cost structure,” said Jud Bailey, an analyst at Jefferies & Co. in Houston. “They’re not jumping on lower service costs simply because they can’t. They’re literally stepping away from anything they’re not contractually obligated to.”

The result may be a “slingshot” effect as spending cuts leave a supply shortage once demand returns, Bailey said. The number of active drilling rigs worldwide has fallen 35 percent from the 23-year high reached in September, according to Baker Hughes Inc. The U.S. rig count has plunged by almost half."