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Drilling permit slowdown having effect on St. Tammany businesses

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By Debbie Glover
St. Tammany News
Published on Wednesday, February 8, 2012 12:09 AM CST

St. Tammany Parish may seem an unlikely place for the drilling permit slowdown to affect business, but the 2010 BP oil spill and now delays from the permit moratorium and lack of permitting for deep water and shallow wells in the Gulf of Mexico are doing just that..

“Absolutely, St. Tammany has many businesses directly and indirectly connected to the oil industry, and they are affected by the industry slowdown caused by the permitting delays,” said Executive Director Brenda Reine Bertus of St. Tammany Economic Development Foundation.

“Some of the parish’s businesses service rigs, some rehab products used on rigs and many are tucked away in the parish. During the study completed by GNO Inc., it was evident many are simply trying to hold on until things turn around,” she said.

Suppliers of rigs, oil supply boats, caterers and equipment already know how hard hit they are, but this has been confirmed by the release of a study of the impact of decreased drilling permit approvals on businesses conducted by Greater New Orleans Inc.

“Offshore service and supply companies are the core of the oil and gas industry in Louisiana,” said Lizette Terral, president of the New Orleans region for the J.P. Morgan Chase Bank. “These small- and mid-sized companies are dependent on activity in the Gulf for their business, and as a result they have been disproportionally hurt by the ongoing permit slowdown.”

Participants in the survey represented small, medium, and large offshore supply and service companies in numerous industries. Answers provided included details on the revenue, cash reserves, employment, business plans, and personal finances of their respective companies.

Key findings of the study show that 46 percent of businesses have moved all or some of their operations away from the Gulf of Mexico. In addition, 41 percent of businesses are not making a profit. Most, or 76 percent have lost cash reserves, and 27 percent of businesses have lost more than half of their cash reserves.

Half of the businesses have laid off employees, and 39 percent of businesses have retained workers but have reduced their hours and/or salaries.

Worst of all, 82 percent of business owners have lost personal savings as a result of the permit slowdown. Another 13 percent have lost all of their savings.

Small– and mid-sized companies are the hidden victims of the permit moratorium and ensuing slowdown,” said Michael Hecht, president and CEO of GNO, Inc. “While global companies can simply shift their assets, these Louisiana companies — through no fault of their own — have endured significant, and now documented, financial hardships.”

“Through this study, GNO, Inc. has determined that the federal moratorium and the permit slowdown created significant negative “unintended consequences” for local businesses. While larger companies have deep cash reserves and the ability to shift assets outside of the country, Louisiana businesses dependent on the Gulf of Mexico for business have experienced significant financial hardship,” reported GNO, Inc.

“The smaller companies are digging into their personal cash reserves to keep going because many of these job require specialized training. In the 1980’s when there was an industry slowdown, the employees left and were very difficult to replace when business increased,” Bertus said. “They want to keep these specialized employees at all costs. Another problem is that the really small companies can’t just pick up and move elsewhere like larger companies.”

In 2011, the average approval time for a drilling plan was 109 days, compared to the historical average of 61 days. All deep-water plans that include any type of drilling activity must now undergo an environmental assessment (EA) process; for those plans requiring EAs in 2011, the average approval time was 213 days, significantly higher than the overall average approval time. Additionally, in 2011, only 34 percent of plans submitted were approved, compared to the historical 73.4 percent approval rate.

Deep-water permit issuance continues to lag the monthly average observed in the year prior to the oil spill. Only two deep-water permits are being issued per month since November 2011, representing a monthly reduction of 3.8 permits, or 66 percent reduction from the average of 5.8 permits per month. This number also represents a five permit or a 71 percent reduction from the historical average of seven permits per month over the past three years.

Shallow-water permit issuance is also below the historical average. Since November 2011, 2.3 shallow water permits, on average, were issued. That number represents a decrease of 4.8 permits or 68 percent from the monthly average of 7.1 permits per month observed in the year prior to the oil spill. This number also represents a reduction of 12.4 permits or a 84 percent reduction from the historical average of 14.7 permits per month over the past three years, according to the gulf permit index.

A lack of permit approval can be taken as a lack of future business in the industry and many small and mid-size businesses have been hit hard with possible lack of future business as they had known it before the oil spill, thus causing many of them to either relocate or close completely, as the study has shown.

The permitting process has become lengthy and mired in red tape, which has slowed the entire industry, affecting businesses throughout the area, even in St. Tammany.

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Drilling ban had ‘hidden victims’

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Written by
Claire Taylor

Half of the South Louisiana oilfield service and supply companies responding to an online survey were forced to lay off employees because of the drilling moratorium and slow permitting in the wake of the BP oil spill in April 2010.

Greater New Orleans Inc., a regional economic alliance, released the results Monday of its online survey of 102 Louisiana offshore supply and service company owners and workers.

The survey was an attempt to document the financial impact of the drilling moratorium and permitting delay on “hidden victims,” particularly small and mid-sized companies

The federal government, on May 30, 2010, enacted a six-month moratorium on deepwater drilling. No new permits were issued. The action effectively shut down the oil and gas industry in the Gulf of Mexico. Additional regulations also affected shallow water drilling, severely slowing permitting for months.

Even though the federal government lifted the moratorium in October 2010, permitting continues to lag. Before the BP spill, on average seven deepwater permits and 14.7 shallow-water permits were issued per month historically. In the past three months, on average two

deepwater and 2.3 shallow-water permits were issued.

Officials at the GNO survey release ceremony on Monday referred to the moratorium and permit restrictions as a “permatorium” and called on President Obama to ease the permitting process, allowing oilfield workers and support personnel to get back to work.

“We’ve got to see this ridiculous bureaucracy change,” Plaquemines Parish President Billy Nungesser said during a press conference Monday.

The hidden victims of the federal “permatorium” include a small mom-and-pop business in Plaquemines Parish that cleaned linens for the offshore industry. They had to shut down, Nungesser said.

“We have jobs here that we don’t have to create,” Jefferson Parish President John Young said, echoing calls to ease or speed the permitting process.

Of the businesses surveyed, 39 percent reported they retained workers but cut salaries and/or hourse to save money. Lori Davis, owner of Rig-Chem, is one of those small Louisiana businesses. As a result, a couple of her employees quit to take jobs at larger companies that still offer benefits, she said.

Larger companies are more global and were able to shift assets elsewhere, insulating them from the moratorium and permitting slow down. Small and mid-sized companies and independents in the oil and gas business don’t have the same capital assets and ability to relocate.

Forty of the businesses surveyed reported they are not making a profit. Four companies reported selling all of their assets and/or going out of business because of the “permatorium,” GNO Inc. reported.

The new federal regulations are making it very difficult for small and medium sized companies to compete, Davis said.

A New Iberia transportation company described the problem in the survey: “Costs of training associated with safety have increased 75 percent. Meanwhile, the competitive nature of the lack of work has driven daily vessel rates down.”

Davis said the regulations are “going to strangle the small business.”

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Transocean risks junk grade as cash flow ebbs

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The Deepwater Nautilus was used to drill Shell’s Appomattox discovery in the Gulf of Mexico. (Houston Chronicle file photo)

Transocean Ltd. is at the greatest risk of being cut to junk-bond status in almost a year as its cash flow is squeezed by tougher safety rules and a glut of drilling rigs.

Credit-default swaps on its debt implied a Ba1 rating on Nov. 7, a step below the current level, the first time since December that the Vernier, Switzerland-based company’s swaps suggested traders were anticipating a cut to junk, according to Moody’s Corp. Moody’s Investors Service yesterday put the world’s largest offshore driller on review for downgrade.

Last month’s $1.4 billion acquisition of Aker Drilling ASA eroded Transocean’s cash position as the company prepares for a February trial over claims and penalties stemming from the Deepwater Horizon disaster in the Gulf of Mexico in 2010. Manufacturing bottlenecks that boosted operating costs 28 percent and led to the biggest third-quarter loss in at least 10 years will persist into 2012, Chief Executive Officer Steven Newman said during a Nov. 3 conference call.

“It’s almost like a perfect storm, you get weaker earnings, plus an acquisition that increases leverage, plus potential for litigation risk, and you’re at the lowest possible triple B minus rating,” said Marc Gross, a money manager at RS Investments in New York, where he oversees $3 billion in fixed- income funds. “It seems obvious to me that in six months this is going to be a high-yield credit.”

Swaps Soar

The cost to protect against a default on Transocean debt has soared 82.3 basis points to 292.3 basis points, the highest since September 2010, in the week after the company posted a $71 million third-quarter loss, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That compares with the average 173.9 basis points on U.S. oil and gas drillers overall. The swaps are implying a Ba1 rating as of Nov. 9, Moody’s Corp. data show.

Default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

“Industry conditions were already weak and then they decide to do the Aker deal, which takes down their liquidity,” said Sean Sexton, a managing director at Fitch Ratings in Chicago who rates Transocean debt BBB-, the firm’s lowest investment-grade rating. “On top of that, we still don’t know what, if anything, they’re going to owe” for last year’s catastrophe in the Gulf of Mexico.

‘Evaluating Alternatives’

“We consider it important to retain investment-grade status for our debt,” Guy Cantwell, a spokesman for Transocean, said in a telephone interview yesterday from Houston. Neither Newman nor Chief Financial Officer Ricardo Rosa was available for interviews, he said.

The average yield on the lowest-rated investment-grade bonds is 4.4 percent, while the highest-rated junk debt is 6.9 percent, according to Bank of America Merrill Lynch index data. Junk, or high-yield, high-risk debt, is usually rated below Baa3 by Moody’s and lower than BBB- by S&P.

Rosa said on the Nov. 3 call to discuss third-quarter results with analysts and investors that Transocean is “evaluating alternatives” to cover $1.7 billion in convertible notes expected to be redeemed under a put option during the current quarter. The company renewed a $2 billion, five-year revolving credit line last week, Rosa said.

Cash Cushion

Transocean’s cash and near-cash equivalents will be “significant” even after it transfers $1.2 billion from its $3.3 billion cash reserve this quarter to finish the acquisition of Aker, Rosa said. The company has a goal of maintaining a cushion of a few billion dollars of cash and near-cash equivalents, he said.

“So we’re not in a situation where this is causing us undue concern,” Rosa said. “We have options available and we’re evaluating them at present.”

The last time credit-default swaps on Transocean debt implied junk status was in December, when the U.S. government sued the company and four others associated with the April 2010 leak at BP Plc’s Macondo well for allegedly violating the Clean Water Act and the Oil Pollution Act. Transocean owned the rig involved in the worst U.S. maritime oil spill and employed nine of the 11 workers who perished. Fitch’s Sexton said the unprecedented nature of the catastrophe makes it impossible to estimate the size of Transocean’s potential liability.

Gulf Suits

The company also has been sued by London-based BP, which was leasing Transocean’s Deepwater Horizon rig, to recover part of more than $40 billion in estimated claims, penalties and cleanup costs. On Nov. 1, Transocean asked a U.S. judge to enforce a blanket indemnity against such claims contained in the contract with BP.

“Until the Macondo court case is resolved, which could last until sometime in 2013, the senior note rating will be clouded by the uncertainty of the ultimate outcome and the possibility that RIG become exposed to significant liabilities associated with the accident and clean-up,” Moody’s said yesterday in a note written by Stuart Miller, senior analyst, and Steven Wood, managing director of corporate finance. RIG is Transocean’s ticker symbol on the New York Stock Exchange.

Standard & Poor’s last month added Transocean to its list of potential fallen angels, or companies that are at risk of losing their investment-grade status, after analysts said on Oct. 5 that the acquisition of Stavanger, Norway-based Aker “will result in a weaker financial profile at a time of soft operating performance.”

Negative Outlooks

Transocean is ranked Baa3 or BBB- with “negative” outlooks by Moody’s and S&P, the lowest investment-grade, according to data compiled by Bloomberg.

Credit-default swaps on Transocean bonds soared by the most since July 2010 after it reported third-quarter results on Nov. 3, according to CMA.

That compares with swaps of 150 basis points on Ensco International Inc., 119.8 on Noble Corp. and 95 for Diamond Offshore Drilling Inc. as of Nov. 8, the data show.

While Transocean’s $1 billion of 6 percent bonds maturing in March 2018 are still trading above par, they have tumbled to 104.8 cents on the dollar as of Nov. 7 from 116.2 cents on Aug. 10, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 4.1 percent.

Gross of RS Investments said that as owner of the world’s largest fleet of offshore drilling rigs, Transocean will “trade well” in high-yield, but the risk lies with the size of the Macondo settlement.

Backlog Shrinks

The company’s backlog of unfilled orders — a gauge of probable future cash flow — shrank to $23.5 billion as of Oct. 17 from $40 billion at the end of 2008, public filings showed. During the next two years, drillers around the world will finish construction on 45 new floating rigs, half of which have yet to be leased, S&P analysts Lawrence Wilkinson and Patrick Jeffrey said in an Oct. 5 note.

That influx of new vessels amid a post-Macondo slowdown in drilling-permit approvals in the U.S. sector of the Gulf of Mexico will “put pressure” on the daily rental rates Transocean will be able to command for its rigs, the S&P analysts said.

The civil trial in the U.S. District Court in New Orleans over thousands of claims by individuals and BP related to last year’s spill in the Gulf of Mexico probably will distract Transocean’s senior management from focusing on improving operating efficiency and rebuilding the backlog, the Moody’s analysts said in yesterday’s note.

Transocean shares fell 39 cents, or 0.8 percent, to $49.90 at 11:26 a.m. in New York.

“They’re in the twilight zone, the gray area between investment-grade and high-yield,” Gross said. “A lot of IG guys might want to just avoid them now if they really think they’re going to high yield whereas high yield guys are going to sit on the sidelines and say it’s not really high yield yet.”

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