With oil prices hovering in the mid-$40 range in early September, the oil industry is sputtering toward a recovery. The Baker Hughes U.S. rig count reached 497 for the week ending Sept. 2. The rig count topped 500 rigs for the week ending Sept. 9 at 508 rigs. The last time the rig count was above 500 units was the week ending Feb. 26 when it was 502 rigs.

Moody’s Investors Services recently evaluated 35 U.S. and Canadian E&P companies. “Assuming $55 oil [and] $3 gas, full-cycle costs are projected to be $42/ boe for oil-weighted producers and $3.37/Mcfe for gas-weighted producers,” Moody’s reported.

The profit margin for most shale plays is razor thin if there is any margin at all. However, the lower cost plays can make some money with prices at about $44. The Permian Basin is the prime example. There were 202 rigs working in the basin Sept. 2, which is 40.6% of the U.S. total.

Although there are some signs of a recovery, there are also some major obstacles to overcome.

The 35 companies that Moody’s evaluated continue to adjust capital spending to mesh with the new environment of lower oil and gas prices. “Average production costs declined for the companies in 2015 as a result of increased drilling efficiencies and lower service costs. General and administrative costs also fell due to higher production as well as reductions in headcount at most companies,” according to the report.

In a report released Aug. 9 Moody’s noted that nearly $110 billion of debt associated with oilfield service companies and drilling contractors will mature or expire over the next five years. Speculative-grade companies account for 65% of all maturities and expirations.

“While some companies will be able to delay refinancing until business conditions improve, for the lowest-rated entities, onerous interest payments and required capex will consume cash balances and challenge their ability to wait it out,” said Morris Borenstein, Moody’s assistant vice president.

Moody’s analyzed 67 companies for the report. Analysts expect that more than one-third will have debt and earnings before income tax, depreciation and amortization above 10 times in 2016. Depressed drilling activity and weak pricing has driven down earnings. These companies are most at risk for debt restructuring and defaults.

On June 30 Moody’s reported that capital efficiency of select North American E&P companies will improve to better-than-2015 levels on the back of higher oil and natural gas prices.

“Amid persistent low oil and natural gas prices, E&P companies have been searching for ways to become more efficient in finding and replacing reserves, reducing costs, and avoiding leverage from creeping higher,” said R.J. Cruz, vice president and senior analyst at Moody’s.

Operators continue to spend within cash flow. Their emphasis is on developing assets that will provide the highest cash flow. Companies that can develop stacked plays in shales like the Permian and Appalachian basins have the best economics. It will take a West Texas Intermediate price remaining more than $50 to see the rig count surge.

Contact the author, Scott Weeden, at slweeden@hartenergy.com for more information.

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