The dose of anesthesia that E&Ps received from capital markets in early 2015 is starting to wear off.

In some cases, $42 WTI prices have made the ache unbearable. In the face of an onslaught of production from Saudi Arabia, Iraq and Iran hammering oil prices, companies are pulling back–in spots–after seven months of bravura drilling.

Companies are beginning to explore long anticipated distress sales. Some face delisting from stock exchanges and have come up empty on loans.

In August, Samson Recourses said it would head into bankruptcy and wait for refinancing, the fourth E&P since July to reorganize while protecting itself from creditors. Other companies are tying off drilling programs for the rest of 2015, saving money at the risk of investor confidence.

Randy Limbacher, Samson CEO, said Aug. 14 that the company has ruffled through a series of initiatives to strengthen business during low commodity prices.

“We–like many of our peers–have not been able to overcome industry headwinds that significantly reduced our cash flows, limited our ability to reinvest in our assets and prevented us from selling non-core assets as we had planned,” he said.

Darren Horowitz, a Raymond James analyst, said Aug. 17 that WTI will likely settle lower than the firm originally forecast, at $50 in 2015 and $55 in 2016.

At $55 WTI, U.S. oilfield activity will likely suffocate.

“Since U.S. E&P companies always tend to re-invest all of their cash flow and then some on drilling activity, determining the U.S. oil service activity outlook is basically a matter of forecasting U.S. E&P cash flows,” Horowitz said.

At lower oil price assumptions, cash flows have gone from red hot in 2014 to hypothermic in 2015.

“We now expect 2015 year over year cash flows to be down 60%, 2016 to be roughly flat and 2017 to be up a whopping 50% over 2016,” Horowitz said.

In the Eagle Ford Shale, for instance, September oil production is expected to fall again, for the sixth consecutive month. Volumes are forecasted to drop to 1.5 million barrels per day (bbl/d), a decrease of 56,000 bbl/d, according to the U.S. Energy Information Administration.

Starving the weakest companies of money and tapering off production may be needed to return balance to the market, analysts said.

But curtailing production may be the hardest chore. Simmons & Co. International said that 85% of the E&Ps it covers exceeded production expectations in the second quarter of 2015.

Stop, Drop Or Deal

In the West Texas Permian Basin, Approach Resources Inc. (AREX) is in hunker-down mode.

The company has suspended drilling for the remainder of 2015.

“While the company is being proactive in protecting its balance sheet, this sends a negative signal on returns in face of cost savings and doesn’t bode well for borrowing-base redetermination,” said Gordon Douthat, senior analyst, Wells Fargo Securities.

Redeterminations are of concern to some companies, but saving cash and trying to make something happen through deals are on the rise.

Goodrich Petroleum (GDP) is trying both. Goodrich sold 40% of its Eagle Ford acreage in July for $118 million. The Tuscaloosa Marine Shale (TMS) stalwart then announced Aug. 5 that it had put off drilling in 2015.

“The company currently has no rigs running in the play but expects to commence drilling operations in early 2016, assuming acceptable crude oil prices,” Goodrich said.

Goodrich controls 300,000 TMS acres, but wells there run expensive. Goodrich said costs are down to $10.5 million, compared to Approach Resources’ $4.5 million well costs.

“The company’s latest two completions registered average IPs of 875,000 barrels of oil equivalent, 99% oil, relatively in line with previous results,” said Mike Kelly, senior analyst, Global Hunter Securities.

Resolute Energy (REN) is trying to sell itself out of a pinch. In March, Resolute dealt noncore assets in the Midland Basin in West Texas to an undisclosed buyer for about $42 million as it embarked on a debt-reduction campaign.

More recently, Petrie Partners began marketing Resolute’s 48,000 net acres in the Powder River Basin.

Liquidity remains a concern. The company had $97 million available at the end of the second quarter. Resolute has $200 million of term notes due in 2019 and $400 million in senior notes due in 2020, said Jeffrey W. Robertson, an analyst at Barclays Capital.

The company is now evaluating bids for its 48,000-net acre Hilight Field and expects to close in the next couple of months, Robertson said. “REN is exploring other strategic alternatives, including joint ventures for its Permian acreage, and infrastructure divestitures in the Delaware basin.”

Despite the mounting frailty of E&Ps financial positions, capital has yet to pull back from oil and gas.

Equity Gets Pickier

In the glam days of the shale boom, huge sums of money could be obtained for the right asset. Even now, as companies head to bankruptcy they are banking on financial rescue.

On Aug. 13, Hercules Offshore Inc. (HERO) filed a pre-packaged plan in bankruptcy court to reorganize, but expects to be out of the courthouse within 45-60 days.

While capital investment in the industry is by no means dying, it is slowly beginning to narrow its focus. In the new equity climate, E&P deals are preferred to propping up balance sheets, said Brian Gamble, analyst, Simmons.

From late January to early March “anyone and everyone was able to come to the market for capital, with balance sheet needs serving as a justifiable backdrop,” Gamble said.

That particular buffet appears to be offering less and less.

Samson plans to restructure its balance sheet and significantly reduce overall indebtedness through investment of at least $450 million of new capital, the company said Aug. 14. But the money will come from second lien lenders, including Silver Point, Cerberus and Anschutz.

And in late June, Swift Energy Co. (SFY) tried to launch a $640 million first-lien term loan but postponed it in the “face of unfavorable conditions in both global and domestic markets,” the company said Aug. 6.

Terry Swift, president and CEO, said the company’s top priority is improving its financial position and increasing liquidity.

“We continue to adjust our cost structure and spending to maximize the liquidity that we have and will evaluate other liquidity enhancing alternatives to position the company for an extended period of lower, more volatile commodity prices,” he said.

Swift noted that the company has an Eagle Ford inventory of several hundred high-graded well locations that are still economic.

Swift has retained Lazard Freres & Co. LLC to advise the company on its capital structure, financing alternatives and strategic opportunities.

Other troubled companies’ assets are being bought. In July, Houston’s Milagro Oil & Gas and Sabine Oil & Gas Corp. also filed for bankruptcy after running up debt for acquisitions or operations. Milagro negotiated a deal beforehand to sell Milagro’s assets to a private company, White Oak Resources VI LLC, for $217 million.

Still, many companies don’t need money, at least not yet. In Simmons’ coverage, E&Ps have drawn 13% on credit commitments. Such credit commitments make up 78% of total borrowing bases.

Oil In The Way

U.S. companies have created an art out of getting oil from a stone.

Production results from the second quarter of 2015 showed clearly that the industry can retool faster than expected, largely through development gains and expense savings, said Daniel P. Katzenberg, senior analyst, Baird Equity Research.

In a way, that’s a problem. The industry may be stuck in a rut without panic over weak finances, several analysts said.

“We reiterate the need for capital to exit the industry in order to restore healthier economic returns,” Katzenberg said. “Fall borrowing base redeterminations look to be the next opportunity” to erase capital.

Most producers seem confident in maintaining current borrowing levels, citing first half of 2015 reserve growth, lower commitments and bank price decks that are only modestly lower.

Simmons’ Gamble said the market must continue to be selective in what it funds–new deals–and shut off balance sheet needs to potentially tighten production.

Regardless of how things look in the short term, the oil market is already being rebalanced.

David Deckelbaum, director and equity research analyst, KeyBanc Capital Markets Inc., told Hart that “the question that has to be answered is how long supply on the oil side can continue to grow for?”

OPEC also faces limitations to its spare capacity, he said.

Pearce Hammond, co-head of E&P research for Simmons, agreed, saying that OPEC spare capacity is already thinning.

“The call on OPEC is set to rise meaningfully over the next few years—a call that is on less stable legs given persistent and seemingly growing Middle East turmoil with potential gremlins galore,” he said. "There will be a future day to extol improving energy macro fundamentals and a nascent (and growing) tailwind for the E&P sector, but we are not there yet,” he said.

And even before the plummet to $41 WTI, annualized production declined 14% among the top 40 oil producers through July, according to Bernstein Research analysis.