Lawsuits over debt sign of an ailing industry

James Fenton
San Juan County

FARMINGTON — A number of  lawsuits filed against Elm Ridge Exploration Co. that include claims of unpaid services, debt and money due totaling more than $2.3 million are the latest signs of an industry downturn that is pushing some local oil and gas companies toward bankruptcy.

The lawsuits seeking repayment from Elm Ridge by a number of oilfield service companies in the Four Corners area have cascaded in recent weeks.

Elm Ridge appears to be the latest example of a company floundering as a result of the economic downturn. The current "bust" has lasted for about 16 months and is not expected to end any time soon, said Wally Drangmeister, vice president and spokesman for the New Mexico Oil and Gas Association.

Debt-laden companies like Elm Ridge must find access to capital to continue operations and survive, Drangmeister said. Even otherwise financially stable companies operating in the San Juan Basin, he said, are having to make careful, strategic financial decisions on a quarterly or monthly basis to stay in business.

On Feb. 9, attorneys for Wellhead Compression, Inc. filed a lawsuit in the Eleventh Judicial District Court in Aztec seeking payment from Elm Ridge and its subsidiaries — Beeline Gas Systems, Bearcat Drilling and Triple P Oil Field Services — for $488,942 at a continually accruing rate of 15 percent annual interest plus attorneys' fees.

Another lawsuit filed by attorneys for Durango, Colo.-based MWD Technologies USA  on Jan. 26 also lists Elm Ridge and its subsidiaries as defendants. That suit claims Elm Ridge owes MWD for "oilfield consulting services, supplies, services, labor, machinery and equipment" the  company provided in 2014 and 2015. The lawsuit demands repayment of $392,913 that carries an annual rate of 15 percent interest plus attorneys' fees, according to court documents.

On Feb. 17, attorneys for Monty and Shannon Striegel's company also filed, suing Elm Ridge for $528,745 plus interest and attorneys' fees.

The same day, High Tech Tools, a Colorado-based oilfield service company, sued Elm Ridge for $70,460.

The next day, attorneys for Kachina Services, a San Juan County oilfield service company, filed suit against Elm Ridge for unpaid services totaling $233,535 plus interest and attorneys' fees. Attorneys for R.B. Snyder Consulting LLC, also a San Juan County-based oilfield service company, filed suit against Elm Ridge for $141,486 plus interest and attorneys' fees.

In Sandoval County's Thirteenth Judicial District Court, attorneys for Diamondback Excavation, Inc. filed a lawsuit against Elm Ridge for $490,682 in unpaid services and damages plus interest and attorneys' fees.

Jack Fortner, San Juan County Commissioner chairman pro-tem, represents Elm Ridge in the Sandoval County case. Fortner could not be reached for comment.

Calls placed to Elm Ridge's headquarters in Dallas and its local offices on County Road 5060 in Bloomfield were not returned.

"It sounds like (Elm Ridge) is heading for the bankruptcy court if they're not already there," Drangmeister said. "You know, oil prices are (a) huge (story), but natural gas prices (also are low). This is a natural gas-driven basin. Just when you think they can't go any lower, they do. It's in the $1.80 range, and it's been under $2 for quite a while."

A recent survey Drangmeister's association tracked indicated that a quarter of all the wells in the San Juan Basin are rendered cash-flow negative with natural gas prices at or below the $2 price level.

And proposed federal rules would add costs for struggling operators. Drangmeister said a rough estimate of the costs to retrofit wells and bring them into compliance could average around $5,000 per well, which could boost the percentage of San Juan Basin wells that are not cost effective to nearly 38 percent.

"If prices hit $1.80 (for natural gas), that is a horrible sign, but the key is the longer prices stay at that level or lower the more financial stress it puts on the entire industry," he said.

That means Elm Ridge will not be the exception and more failing companies are likely to follow.

As of this writing, only one drilling rig was active on the New Mexico side of the basin.

That well is being drilled by WPX Energy. The Tulsa-based company sold its 220-mile San Juan Basin gathering system at the end of December and the company's $185 million gathering system in Williston, N.D., in November as part of a strategic focus on reducing a net debt of $3.2 billion.

Drangmeister said the double whammy of low commodities prices and pending federal regulations will be difficult for even the strongest, debt-free companies. But they are a likely death knell to companies with significant debt.

"If you're cash-flow negative on a group of your wells, literally you're losing money and you have to either get the money from other wells that are making money or any sources of financing to keep those wells open in the hopes of when or if prices improve again," he said.

James Fenton is the business editor of The Daily Times. He can be reached at 505-564-4621.