Hey, brother, can you spare a line of credit?
Maybe the energy industry isn’t quite ready for that twist on the old Depression-era song, but it could be around the corner.

No one knows how severe the credit crunch will be in the months to come or how the US Congressional bailout plan will play out.

What seems a certainty is that corporate debt will become scarcer and costlier. And a booming energy sector won’t be immune from the credit meltdown fallout.
Those observations come from J. Marshall Adkins, analyst with Raymond James & Associates Inc.

The global energy outlook has undergone fundamental change from just a month ago because of the Wall Street collapse, Adkins points out. We’ll need to ratchet down energy price and demand forecasts because of the weakening economy.  Highly leveraged companies will be more likely to see weaker earnings and sagging growth because of the  capital availability squeeze and greater debt costs. Asset valuation will become more volatile and less reliable, along with a slump in merger and acquisition action. Capital budgets will be cut. Cash-flush companies with low debt will pounce on the overleveraged firms. Investors will smile on the former and spurn the latter.
Gee, Marshall, thanks for that pick-me-up.

Remember those bumper stickers from the later 1980s offering a prayerful entreaty heavenward to deliver another oil boom that the entreater promises not to squander this time (albeit put in earthier terms)? Looks like Wall Street’s latest crop of the Masters of the Universe managed to preemptively flush for you this time, folks.

Raymond James assessed the energy sector in terms of which subsector would be the hardest hit by the credit crunch. In delivering that assessment, Adkins cautions that it is important to remember that not all debt is created equal: “For example, those companies with longer-term, fixed-price credit facilities should be much better off than those with floating rates from bank lines of credit. Additionally, bank covenants and other factors make each debt situation different.”

So who fares the best among energy sector companies in a credit crunch?

E&P companies will be hard-pressed to maintain robust capital budgets, making it tough to replace or expand production. M&A action will slow further among these companies, creating a buyer’s market over time for companies not mired in debt and enjoying strong cash flow.

Oil field service and supply companies have low debt leverage and strong cash flows, but a lack of credit for E&P companies will dampen drilling activity and ultimately crimp service company earnings.

Some alternative energy companies will take it on the chin, especially ethanol producers facing not only tight credit but slim margins. However, solar photovoltaic manufacturers generally have strong balance sheets, and utility adoption of solar and wind energy probably won’t be hit as hard by the credit crunch because utilities have good access to debt.

Although coal companies are highly leveraged, a big improvement in pricing in 2009 contracts will spawn strong cash flows and substantial deleveraging of debt next year.

Midstream master limited partnerships will see their growth slow because of their heavy reliance on capital markets for funding growth. But attractive yields, stable cash flow, and the urgency of upgrading energy infrastructure add up to MLPs being “one of the most compelling long-term risk-to-reward equations across the entire energy spectrum.”

On balance, energy market fundamentals are as robust as they’ve ever been.  Oil and gas prices, while down sharply from summer record peaks, are still strong.  The long-term outlook for energy demand and new energy infrastructure is exceedingly bright.  Most energy companies are flush with cash.

But it looks as if that little credit crunch will squeeze growth and activity and thus will have many energy sector companies singing a different Depression era-tune in 2009:
I Got Plenty o’ Nuttin.’

Tags: alternative energy companies, coal companies, credit crunch, debt leverage, E&P capital budgets, energy companies, oil field service and supply companies, Wall Street meltdown

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