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Actionable news in MHR: MAGNUM HUNTER RESOURCES CORPORATION,

Oil Patch Braces for Financial Reckoning

Magnum Hunter CEO Gary Evans says the company is selling a pipeline to raise cash.

U.S. energy companies have defied financial gravity for more than a year, borrowing and spending billions of dollars to pump oil, even as crude prices plummeted. Until now.

The oil patch is expected to finally face a financial reckoning, experts say, with carnage occurring as early as this month. One trigger: Smaller drillers are bracing for cuts to their credit lines in October as banks re-evaluate how much energy companies’ oil and gas properties are worth. But with oil trading below $45 a barrel, bigger oil outfits are struggling to stay profitable, too.

Jim Flores, vice chairman of Freeport-McMoRan Inc., FCX 3.46 % which pumps oil in the Gulf of Mexico, explained the industry’s conundrum this way: “It’s raining and it’s going to rain for a long time. We’re all going to get wet. A few people are going to drown. You just have to make it to the other side.”

Mr. Flores’s friend Al Walker, chief executive of Anadarko Petroleum Corp. APC 4.61 % , one of the biggest oil companies in the U.S., recently told the audience at a Barclays BCS 0.51 % energy conference, “Frankly at the end of the day, none of us have a great sense for where oil prices are going.”

Some smaller companies are already negotiating with their lenders, dumping assets at distress-sale prices and delaying payments to vendors as they try to preserve cash.

“There clearly are companies that are going to have to reposition their businesses,” said Michael McMahon, a managing director at investment firm Pine Brook Partners, which has $6 billion under management and provides cash to startup energy producers.

Though the financial pain likely will be concentrated among some of the smaller and more debt-laden companies, it could ultimately have big effects on the global oil markets.

Federal data released last month showed that U.S. production has finally started to fall, to about 9.3 million barrels a day in June, down roughly 3% since 2015 oil output peaked in April. And capital constraints could help push output down by 500,000 barrels a day by the end of 2015, Citi Research estimates.

That would be like Exxon Mobil Corp., the largest energy company in America, halting its U.S. oil production—and then some. Put another way, it would require nearly 20 publicly traded U.S...


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