Big oil borrowed billions. Now it's getting burned

By Chico Harlan

Swift Energy chief Terry Swift walks the grounds at a company drilling site in Tilden, Texas. Washington Post photo / Michael S. Williamson
Swift Energy chief Terry Swift walks the grounds at a company drilling site in Tilden, Texas. Washington Post photo / Michael S. Williamson

He'd borrowed from banks and investors and retirement funds, all in a frenzied mission to drill for oil and gas, and by the time Terry Swift realised he'd gone too far, this was his debt: US$1.349 billion.

His company, founded by his father almost 40 years earlier, had plunged into bankruptcy and laid off 25 percent of its staff. Its shares had been pulled from the New York Stock Exchange. And now Swift was in a company Chevrolet Tahoe, driving back to the flat and dusty place where his bets had gone bust.

Swift was coming to this energy-rich strip of South Texas trying to grapple with how much blame he shouldered for the failure of his company.

A low-key and historically cautious oil chief executive who eschews private jets and orders low-fat salads for lunch, he had made what he thought was the best financial move of the past decade - a gamble on rising oil prices - and yet he was ensnared in an industry-wide craze of dangerous debt.

"Maybe we were wrong to believe there wouldn't be a bust this bad," Swift, 60, said as the Tahoe rumbled south of San Antonio. "It didn't even feel risky."

Swift's miscalculation has made his company, Swift Energy, a casualty of the greatest wave of financial defaults since the subprime mortgage crisis ravaged the U.S. economy.
For him, it's a painful low point in his family's 111-year journey in American oil, one that started when his great-grandfather set up a series of storage tanks in the plains outside Tulsa.

And it's a jarring reversal from just a few years ago, when Swift felt as if he'd taken his company to a pinnacle by capitalising on a massive surge in U.S. energy production - one that promised an era of American energy independence thanks to revolutionary new technologies.

Valero Energy spent $50 million to improve its refinery in Three Rivers, Texas, before oil prices plunged. Washington Post photo /  Michael S. Williamson
Valero Energy spent $50 million to improve its refinery in Three Rivers, Texas, before oil prices plunged. Washington Post photo / Michael S. Williamson

This new wave of bad loans isn't of the same magnitude as the housing bust, but it reflects similar behaviours. Borrowers feasted on what Bloomberg estimates was $237 billion of easy money without scrutinising whether the loans could endure a drastic downturn.

The consequences are far-reaching: The U.S. oil industry, having grown into a giant on par with Saudi Arabia's, is shrinking, with the biggest collapse in investment in energy in 25 years. More than 140,000 have lost energy jobs. Banks are bracing for tens of billions of dollars of defaults, and economists and lawyers predict the financial wreckage will accelerate this year.

Maybe we were wrong to believe there wouldn't be a bust this bad. It didn't even feel risky.
Terry Swift

South Texas, along with North Dakota, had been the testing grounds for the industry's ambitions, a place where shale oil and gas companies had taken on billions in loans to support more drilling and fracking. The strategy was to gather up drilling sites at turbo speed and later slow down and reap the benefits. But then oil prices plunged and stayed down. They have fallen 60 percent from two years ago.

"It was drill, drill, drill," said Fadel Gheit, an analyst at Oppenheimer, an investment bank. "Every Tom, Dick and Harry was trying to become an oil baron. Now all of a sudden you say, my God - all these people spent beyond their means."

As Swift arrived in Tilden, the site of some of Swift Energy's fields in South Texas, the signs of decay were everywhere. Scrubby two-lane roads once clogged with heavy-duty vehicles were almost empty.

This food truck in Pleasanton, Texas, was once so busy with oil workers it would run out of food, its owner said. Washington Post Photo / Michael S. Williamson
This food truck in Pleasanton, Texas, was once so busy with oil workers it would run out of food, its owner said. Washington Post Photo / Michael S. Williamson

Roadside hotels that sprang up to meet demand - including one that once was booked solid for a year by Halliburton - had vacant parking lots and dust glazing the windows. McMullen County, where tens of thousands had worked every day at the peak, had shrivelled back to a quiet place of 800.

The Tahoe turned onto a straight country road and headed toward Swift Energy's field office, a series of trailers that were the base for its drilling operations. Little paddles of cactus nuzzled a fence that ran alongside the road, and Swift spotted a few cows near the entrance, the only visible activity along the horizon.

"We'll have to chase them out," he said.

He was quiet for a moment, pausing on what had transpired.

"You know the thing that's disappointing?" he said. "All the wealth that was created - it dried up."

- - -

America's great energy boom resulted not simply from gains made by the established giants - ExxonMobil and Chevron - but rather from the rise of hundreds of smaller companies.

And those smaller companies grew with debt, using it to drill 8,000 feet into Earth's crust and 10,000 feet across, renting equipment, pumping in millions of pounds of sand and creating fractures that released oil and natural gas.

This was hydraulic fracturing, or fracking, the technology that, in the middle of the last decade, allowed companies to reach oil and gas that was previously inaccessible. Companies had a choice - borrow to enter the fracking race, or stay on the sidelines and risk losing out.

'All the wealth that was created - it dried up' said Terry Swift, chief executive of Swift Energy. His company filed for bankruptcy protection in 2015. Photo / Washington Post Michael S. Williamson
'All the wealth that was created - it dried up' said Terry Swift, chief executive of Swift Energy. His company filed for bankruptcy protection in 2015. Photo / Washington Post Michael S. Williamson

Most, including Swift, chose to frack.

That decision, multiplied across hundreds of producers, has nearly doubled U.S. oil production since 2007. And while politicians and executives celebrated that new capacity - dramatically reducing U.S. dependence on foreign oil - few discussed the dangerous financial risks.

The industry's debt, after all, had also nearly doubled. Producers such as Swift didn't think this was a bubble: Instead, they saw a new chapter in American energy - one in which technology had helped expand the market permanently at a time of global energy needs, led by China.

"Not that the industry was bust-proof, but the cycles maybe wouldn't be as deep," Swift recalled. It was a profoundly wrong call.

"By the time this is over," he said, "this might be the worst of all the busts."

Swift had been in the oil industry since graduating from the University of Houston with a degree in chemical engineering in 1979. He started off in Texas for a few years and in 1981 joined the company run by his father, Aubrey Earl Swift, who died in 2006. There, he was initially dispatched to work overnight shifts in West Virginia. He calls himself a geological nerd and happily talks for hours about rock formations and sonic mapping tools.

"It gets in your DNA," Swift said.

Before fracking, Swift Energy had been a medium-size player - operating conventional oil and gas wells in Louisiana and Texas - that had relied on much the same formula for more than a decade.

Not that the industry was bust-proof, but the cycles maybe wouldn't be as deep. By the time this is over this might be the worst of all the busts.
Terry Swift

It kept its debt to a minimum. It drilled somewhere between 30 to 70 wells per year. It also had owned previously sleepy tracts in South Texas's Eagle Ford, an area that, with fracking, looked like America's next energy moneymaker. Swift felt his company had lucked out.

"The play was getting bigger and bigger," Swift said. "So our vision was, we could do this."
As the company began to frack more often, the amount it spent on exploration and drilling skyrocketed by hundreds of millions of dollars.

To cover that spending, Swift Energy issued three separate packages of bonds worth US$875 million. It also had a credit line of $500 million from JPMorgan. Altogether, the more than $1 billion in debt represented an amount so large that if the company had combined its profits from its 20 best years, it could not have paid it back.

It was drill, drill, drill. Every Tom, Dick and Harry was trying to become an oil baron. Now all of a sudden you say, my God - all these people spent beyond their means.
Fadel Gheit, an analyst at investment bank Oppenheimer

Not long after, cracks began to show in Swift Energy's plan. The first problems, Swift thought, seemed manageable. Swift Energy was drilling in five places across Texas and Louisiana - each a different kind of dirt - and was taking a little longer than competitors to figure out the best drilling methods.

Several times a year, Swift would pledge to pull a certain amount of oil and gas from the ground, then tell investors that the company had missed its targets. Often, its share prices would tumble. "They were horribly inefficient," said David Deckelbaum, an analyst at KeyBanc.

The play was getting bigger and bigger. So our vision was, we could do this.
Swift Energy chief Terry Swift

Then Swift Energy began to feel the pain of unexpected global developments. Natural-gas prices started to dip. Then the price of oil fell off a cliff in November 2014 when Saudi Arabia, in a bid to retain market share amid greater U.S. competition, increased its production. Meanwhile, global demand sagged, again led by China.

Swift realised a manageable problem was no longer manageable. The company needed cash just to make interest payments, and nobody would lend it more money.

Swift tried to perform triage. He laid off employees. He called vendors and asked for lower prices. He chiselled at expenditures.

The company's lender, JPMorgan, began tightening the funds Swift Energy could withdraw. The company's stock - above $40 per share in 2011 - dipped below $1, and then below 25 cents.

Swift, along with the company's chief financial officer, Alton Heckaman, spent days at the computer running scenarios.

Can we survive if oil bounces back to $60?
Are we doomed if oil hits $30?

Running out of cash, Swift realised his company was bound for bankruptcy. "I knew it was the best path," he said. "Doesn't mean it was a great path."

• On December 1, Swift skipped an interest payment to its bondholders.
• On December 18, the company's shares were yanked from the New York Stock Exchange because of their "abnormally low" prices.
• And on the night of December 31, Swift and Heckaman gathered at their Houston office, signing the last bankruptcy papers.

"The debtor requests relief in accordance with the chapter of title 11," one of the documents said, and in this case restructuring meant that everybody who'd once owned stock in Swift Energy would lose virtually everything.

It was not alone. In 2015, 42 oil and gas companies failed, according to Haynes and Boone, a Dallas-based law firm, and this year that number is projected to accelerate.
"It was a disaster for everybody," said J. Ellwood Towle, a St. Louis-based investor who was among Swift Energy's biggest shareholders.

- - -

Here in Tilden, 80 miles south of San Antonio and 100 miles north of the Mexico border, Swift Energy had rented out its own "man camp" - a compound of prefabricated trailers - to house workers recruited from as far away as Ohio. For the three-person trailers, the company paid $3,000 a month. The 13-trailer compound felt at the time like the only option, Swift said. Without a man camp, you could spend $5,000 a month just to house an employee.

In the Eagle Ford basin, the number of drilling rigs doubled between 2011 and 2012, topping 250. Prices for land spiked a hundredfold. Swift had put up with the prices because the potential rewards were so great, but now he was directly facing the consequences of those decisions.

See a Google Map showing Tilden, Texas:


Swift walked into the field office to meet with Robbie Walters, the supervisor who managed all the production in South Texas. Walters sat in a wood-panelled office covered in geological maps.

"Down here just for the day?" Walters asked. He never mentioned the bankruptcy.
"Just for the day," Swift said.

Mother Earth has treasures, and there are prizes if you can extract them.
Terry Swift

Walters talked, instead, about the broader landscape. About the empty hotels. The businesses that had disappeared. The Tex-Mex restaurant, Pepe Boudreaux's, that had shuttered only weeks earlier.

"You look back and you see it wasn't sustainable," Walters said.

Now, only 43 rigs were operating in the Eagle Ford.

"It was very competitive," Swift said. "If you ever blinked and said, 'I'm not sure about sustainability,' you'd get put in the bleachers. The longer you waited, the more you missed out."

Swift returned to the Tahoe and checked out some other spots in the Eagle Ford: a new gas well that was being tested and the company's man camp, where they were trying to renegotiate a better rate.

While touring the field, Swift stayed mostly quiet, instead listening to his employees detail how well the work to develop oil and gas wells was going. But on the drive home, he had something to say. It wasn't so much an explanation for his company's demise but rather an explanation for his actions.

Comparing the joy of pulling oil from the ground with a "baby being born," he said, "Mother Earth has treasures, and there are prizes if you can extract them." He added: "I don't ask myself when I wake up, 'How much money do I have?' I'm still an oil guy."

But even if he remains an oil guy, his father's company will no longer be controlled by one.

When Swift emerges later this year from a lengthy federal court process in Wilmington, Delaware, Swift will still be chief executive. But the company will be owned by bondholders, including the hedge funds that swooped in last year - when it was obvious Swift Energy was in trouble - and bought, for dimes on the dollar, the bonds that were certain to default.

Swift doesn't even know whether the company will retain its name.

"If I was in total control, I'd answer that," Swift said. "I'm not in total control."

- Washington Post

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