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IHS: Cheap Oil Will Drive More Small, Midsized Producers To The Breaking Point In 2016

The futures contracts that allowed companies to lock in higher crude prices last year are about to expire. That will leave many unable to pay their debts.

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More small and midsize oil companies could be forced to seek buyers or declare bankruptcy in 2016, barring a sharp pickup in crude prices. That's the conclusion of a new study from economic research firm IHS.

Oil and gas production companies often use contracts called hedges to buffer themselves from the shock of rapidly shifting prices. Firms pay to lock in current prices for a set number of months, guaranteeing they'll be able to sell what they produce at that price, no matter how far the market falls.

But next year, those hedges will plummet to just 11 percent of North American production volumes, as contracts purchased in 2014 expire.

"Some of the high-debt names, which are maybe tapped out from additional external financing in the debt and equity markets, might have to be forced into selling assets, which could spur some M&A [merger and acquisition] activity," says Paul O'Donnell, principal equity analyst with IHS Energy.

The report names Houston-based Ultra Petroleum as one company at particular risk, due to high debt and expiring hedges. But it also points out several companies, such as Houston's Halcón Resources, that managed to buy themselves additional time.

"There was a small window of opportunity during the second quarter when prices were comparatively higher than where they are just now, and we did see a number of companies layer in additional hedging during that time," O'Donnell says.

He warns companies that missed the window will face heavy pressure to cut back on spending to avert further losses in the months ahead.