A ‘’Gusher Of Red Ink’’ for US Shale

Over 170 shale companies have declared bankruptcy since 2015, affecting $100 billion in debt, including 8 bankruptcies already this year.

By Nick Cunningham, Oilprice.com:

Oil prices are off more about 20 percent in the last two weeks on growing fears of a brewing economic recession. Commodities of all types have been hammered by the pessimism.

“Fear of global economic growth slowing,” said Peter Kiernan, lead energy analyst at the Economist Intelligence Unit (EIU), according to Reuters, “afflicting the entire energy complex with worries that demand growth will be bearish this year.” Prices for coal, natural gas and LNG, and crude oil have plunged.

“The continued escalation in trade tensions and broad-based fall in manufacturing…suggest that the downside risks to growth are becoming more prominent,” Morgan Stanley analysts said in a note.

Yet another downturn could not come at a worse time for U.S. shale drillers, who have struggled to turn a profit. Time and again, shale executives have promised that profitability is right around the corner. Years of budget-busting drilling has succeeded in bringing a tidal wave of oil online, but a corresponding wave of profits has never materialized.

Heading into 2019, the industry promised to stake out a renewed focus on capital discipline and shareholder returns. But that vow is now in danger of becoming yet another in a long line of unmet goals.

“Another quarter, another gusher of red ink,” the Institute for Energy Economics and Financial Analysis, along with the Sightline Institute, wrote in a joint report on the first quarter earnings of the shale industry.

The report studied 29 North American shale companies and found a combined $2.5 billion in negative free cash flow in the first quarter. That was a deterioration from the $2.1 billion in negative cash flow from the fourth quarter of 2018. “This dismal cash flow performance came despite a 16 percent quarter-over-quarter decline in capital expenditures,” the report’s authors concluded.

They argue that the consistent failure for the sector as a whole to generate positive free cash flow amounts to an indictment of the entire business model. Sure, a few companies here and there are profitable, but more broadly the industry is falling short. The “sector as a whole consistently fails to produce enough cash to satisfy its voracious appetite for capital,” the report said. The 29 companies surveyed by IEEFA and Sightline Institute burned through a combined $184 billion more than they generated between 2010 and 2019, “hemorrhaging cash every single year.”

Rystad Energy put it somewhat differently, although came to the same general conclusion. “Nine in ten US shale oil companies are burning cash,” the Norwegian consultancy said late last month. Rystad studied 40 U.S. shale companies and found that only four had positive cash flow in the first quarter. In fact, the numbers were particularly bad in the first three months of this year, with the companies posting a combined $4.7 billion in negative cash flow. “That is the lowest [cash flow from operating activities] we have seen since the fourth quarter of 2017,” Rystad’s Alisa Lukash said in a statement.

“Recently released data, which confirmed dismal first quarter earnings, only served to cement negative market sentiment,” Lukash said. “While shale operators continue to focus on improving capital efficiency, investors are putting the industry under extreme pressure, leaving no room for undisciplined spending in 2019.”

More than 170 U.S. shale companies have declared bankruptcy since 2015, affecting nearly $100 billion in debt, according to Haynes and Boone. There have been an estimated 8 bankruptcies already this year, with some $3 billion in debt restructured.

“Frackers’ persistent inability to produce positive cash flows should be of grave concern to investors,” authors from IEEFA and the Sightline Institute wrote. “Until fracking companies can demonstrate that they can produce cash as well as hydrocarbons, cautious investors would be wise to view the fracking sector as a speculative enterprise with a weak outlook and an unproven business model.”

The industry kept humming along over the past few years, riding out multiple downturns due to periodic reinjections of capital from Wall Street. But, investors are beginning to sour on shale drillers. Very little fresh capital has been raised by shale companies, either from new equity or bond issuance, since late last year, according to IEEFA and Sightline.

The industry now finds itself at a cross roads. With capital markets beginning to shun shale drillers, consolidation is likely the direction the industry will take. The best bet for struggling companies now is to find a willing buyer.

But several oil majors have recently said that shale drillers are fooling themselves with their asking prices. “Most of the things we see tend to look overpriced, and we have tried to maintain cool heads,” Royal Dutch Shell’s CFO Jessica Uhl said on Tuesday, according to Argus Media. Exxon’s CEO Darren Woods echoed that, saying last week that there is “not always alignment among buyers and sellers.” ConocoPhillips’ chief executive Ryan Lance said there are “a lot of bid-ask issues in the market today,” adding that an “expectations change” will be needed before more M&A can occur.

The renewed plunge in oil prices may inject a dose of reality into the shale sector. With WTI back in the low-$50s, the pressure on struggling drillers may intensify. By Nick Cunningham, Oilprice.com

In its relentless pursuit of oil, the shale industry burns more and more gas into the air. This wasted gas exceeds the yearly demand of nations such as Colombia. Read… The Gas Flaring Crisis in the US Oil Patch

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  34 comments for “A ‘’Gusher Of Red Ink’’ for US Shale

  1. MD says:

    Profits are a 20th century ‘pre-financialization’ relic though, aren’t they..?

    Nowadays it’s just a case of piling in with a mass of cash, creating ‘momentum’ then offloading to another computer which is using the same algo as yours..?

    When it all goes belly-up – again – just get the central banks to print trillions.

    It’s a perfect ‘no lose’ casino until the day it suddenly and viciously isn’t.

    • Old Engineer says:

      Well, MD, I think you are right. This article is absolutely hilarious, coming on the heels of Wolf’s article yesterday about Amazon and the discussion of companies with impossible business plans in the comments. Why should fracking be any different than Amazon, Uber, Lyft, Tesla, and the others. It seems to be the new American business model: “lose a little on each sale and make it up in volume”.
      The real problem is that all of these companies, fracking companies included, require the consumer to pay more in order for the companies to make money. And this plan is doomed when consumers don’t have growing disposable incomes.

      • MCH says:

        It is kind of amazing that most of these shale places are so wasteful and also run by people whose basic strategy amounts to “I hope oil prices go up.”

        But bankruptcies will eventually lead to consolidation and holding onto the best properties until prices turn up again. Really interesting that people are looking at these marginal shale capacities and trying to make use of it. I personally would like it if they turned Iran back on. May as well bleed that ME oil out if possible.

        • Mean Poet says:

          Almost all the oil that can be produced is being produced, high prices are not going to add much to production. There is no great incentive at national level to over produce , over production lowers prices below the level needed for national finance of many countries. All the oil produced is being used, that is to say that higher prices are a geopolitical event because they will change distribution, and that means various countries are vulnerable, as well as the global financial system. Oil played its part in the financial crisis, the US is vulnerable to high oil prices. By securing own production the US has a buffer should its “geopolitical outreach” fail . Shale is portrayed as a confidence asset to the US public and the world, whether purposeful expansion into shale production is as a fallback or is part of an agenda that predicts supply disruption is not a question that is easily answered.

      • nick kelly says:

        Amazon doesn’t belong with Uber and Tesla. It does make a profit, just nowhere near enough to justify its valuation. As a warehouse and delivery outfit, although a good innovative one, its PE could maybe be stretched to 30 to 1. It moves billions to make millions.

        The sweetest biz was software. It’s written once and then can be delivered and billed electronically. That and chips etc, actually ARE tech. Calling Uber and Amazon etc. ‘tech’ is a sales gimmick.

        Amazon will not go TU in the recession but the other two will. Tesla might not make it that far. They both have to keep borrowing to keep afloat, like shale.

    • HowNow says:

      Thank you, Nick, for your very revealing article on the fracking industry.

    • DV says:

      This increasingly looks like a plan-based economy, which used to have a concept of planned losses. So the government has told the oil majors to come back to the US and to take over unprofotable shale. As if they did not try in the past and burned hundreds of billions in the process. But, yes, oil majors can sustain shale for another ten years by burning through more cash. But they simply cannot refuse, as the country needs to fix its trade deficit. Without shale it would be skyrocketing.

  2. Senecas Cliff says:

    To Quote Nicole Foss of The Automatic Earth Blog, “ Conventional Oil is like walking in to a bar and getting a tall mug of draft beer to quench your thirst, Fracking is like trying to do the same thing by getting down on your hands and knees and sucking the spilled beer out of the carpet .”

    • Howard Fritz says:

      While an apt metaphor I fear that mental image is now permanently burned into my psyche.

    • PEAKOIL says:

      I am confused.

      If we have so much conventional oil remaining, why are we sucking oil up out of the carpet and losing billions doing it?

      Come to think of it, why are drilling miles beneath the sea and why are we steaming oil out of sand in Alberta?

  3. Wisoot says:

    Whoever it was that discovered earthquakes stop on bank holidays should be applauded. Videos of people setting fire to water on their property were equally shocking. A sobering thought that without fresh clean water, our bodies would struggle. The shale industry had a good go, threw alot of money at marketing, and policy makers, encouraged debate, but the cold hard truth is that collapsing the earth under our feet for short term gain is not a sustainble saleable palatable pill to swallow for house owners and those that prefer solid ground to hand down to their kids. Need another longer term strategy. How about a tidal power station or two? Solar powered desalination plants? Geothermal? Thorium Nuclear?

    Responding to MD’s point, the next three months will be interesting. The wound is opening up for those who are incapable of printing money themselves and are unable to reason why a system such as this where some can and some can’t magic money out of thin air is viable. Many mulling alternatives. A fly on the wall at the bilderberg meeting in Montreux over the last week might be able to tell us more about the plans for the future of bartering on planet Earth…

    • Cynic says:

      Civilisation does not proceed on the basis of long-term strategies: expansion, plateau, collapse – in a degraded environment created by over-shoot – is the usual pattern. It’s unstoppable.

      • Wisoot says:

        Expansion Plateau Collapse. This describes the 11 year solar cycle of sunspot activity otherwise known as nature. Easily spotted in a 100 year human life span. Less easy to spot would be a 250 year planetary cycle. To understand planet Earth and the long term strategy of its makers I’d start with Bill Thompkins on Rense. Perhaps another reason why shale is underperforming. The real investments in back engineered energy technology remain off limits to open markets.

    • nick kelly says:

      No one can print magic money as you aptly refer to Magic Monetary Theory. Britain thought it could until there was a run on the pound in the 70’s. The BOE had to halt foreign exchange operations. In a company this would be called bankruptcy.
      Chapter 13 for countries is the IMF, which is where Britain had to go.

      Many countries print and print but no one wants the result. If Italy manages to convince itself that it would be better off printing lira than being told to spend less by the ECB, we are going to witness a new, almost instant, Venezuela in Europe.

      The US, like Britain before it (and a dozen other empires) is mortgaging itself at the rate of three thousand million a day. The wealth of the country was built up by the hard work and enterprise of two centuries.
      That is the well from which today’s politicians draw popularity, not the magic of the press. The Federal Reserve notes are checks drawn on this wealth.

      It takes a while to burn through this wealth, but if something can’t go on forever, it will end.

      It seems to be an article of faith to the MMT group that the budgeting of a country is fundamentally different than the budgeting of a household.
      (If that is true in economics, it isn’t in physics where understanding the micro is how science explains the macro.)

      In the End Game, or bankruptcy, they look awfully similar.

      When Britain had to approach the IMF after having twice been turned down by West Germany, the negotiations were difficult. The Brits could not initially grasp that the IMF loan came with conditions ( e.g. selling part of BP oil)
      One American on the board said the problem was ‘convincing the British that they had run out of string’

    • Em says:

      Will try to ge a micro drone to audio record those meetings…
      Or rent one if someone else beat me to it.

  4. David Hall says:

    Small oil companies may lack good management and capital. Oil and gas is cyclical. The down cycles produced bankruptcies. Truth of the matter is the US was the largest oil importer on earth. Now the US produces over 12 million barrels a day; more oil production than Saudi Arabia or Russia. This is because of fracking. Some oil companies are earning income.

    • Jack says:

      The US produce 15 million barrels per day
      And the US consumes 19 million barrels per day.

      So No.

      The US will continue to be a Net Importer of oil and derivatives for the foreseeable future, hence the dogged persistence in the US Foreign policy of controlling the ME oil countries.

      As for Shale oil , the technological advances in Oil drilling techniques and the engineering aspects have given investors the ( False promise) of immediate returns on investment even as ( Maths) is against their wish.

      The break- even ( prospectus)/s sold (CLEVERLY) to investors ( large bank accounts, low maths skills,) you know the variety of the Fool and his money?!

      That break even point for most US and Canadian shale wells was touted at $40-50 per barrel which is a huge under-estimation, the real figure is anything between $90-120 !

      But there you have it. Give the Wall Street marketeers a chance and they’ll sell you anything you want for the price your heart desires. :)

      On a lighter and less Grimm note though, and as mentioned above in the comments,

      The Economy of the Shale oil industry will eventually work out once the FOOLS have been cleaned of the majority of their investments ,and consolidation starts plus the prospect of the oil majors ( the SHELLS and Exxon’s and BPS of the world) gets to split the ( carcasses) .

      Only then you’ll begin to see profits flowing from at least 60-80%) of Wells that have infrastructure already in place.

      Ah , but these scenarios might NOT eventuate in the next 5-10 years!!
      Due to the position that Mr. Tariffs man put the world economy into.

      So With rise in energy consumption prospects taking a back seat, we’ll see more bankruptcies in this sector ( more carcasses left for your beloved majors ) !

      Give this around 5-7 year to eventuate at its current ( cooking pace) .

      Armed conflict or A Big downturn {excluded}.

      All the same, great article, keep them coming. Thank you Nick, Wolf and the community of Wolf Street.

  5. noonespecial says:

    And yet in my home country of Colombia, we have this news:
    Colombia’s top administrative court on Friday began hearings that could be long and contentious about proposals to drill for oil using the technique known as fracking, hailed for sharply boosting supplies but criticized for causing environmental damage. (from reuters).

    Am I just too naive to expect the conservative leadership in power to be aware of the gusher described herein?

    • Em says:

      They are aware and don’t care!

    • Jack says:

      Colombia is owned by the US!
      as is the rest of SA .!!

      So, your population’s interests is of No consequences to the bigger picture!

      That is Until something drastic happens in the way the political processes are carried out in Colombia and the larger continent.

      Nothing personal, it’s all business, and your political elite have signed the farm and the factory to their Masters.

  6. Howard Fritz says:

    Wait so when the game of musical chairs comes to a close surely the taxpayers won’t be on the hook for the bill once again. I fear this group won’t be able to withstand under downturn quite like that.

  7. truthalwayswinsout says:

    It doesn’t matter what they do. If people lend them the money, that money is at risk. As far as capacity is concerned it still remains because someone will buy that cash flow or it will be reorganized in bankruptcy to make it work.

    The oil does not disappear, its ownership or conditions of ownership change hands.

    What might be happening is the move to double the oil prices over the next year.

    • roddy6667 says:

      The oil DOES disappear. Shale oil wells deplete much quicker than the companies are willing to admit.

  8. roddy6667 says:

    Not much difference between shale oil and snake oil.

  9. Nicholas says:

    A Shale Oil company just needs to rename itself to Tesla Enterprises and tweet alot. After that, no one will care about cash flow.

  10. No Free Lunch says:

    Just like gold, just like rare earth elements, profitability comes down to extraction costs vs. yield. Yield (product obtained per ton of rock affected) is directly related to concentration of the product in the rock. Just like gold, some areas of shale have a higher yield, and some not so good. They are certainly not all the same, as implied in this article. The best areas do and will make good cash flow, and the worst will always lose money, until they are bankrupt. It is certainly not the case that none make money. The shale technology has stabilized on predictability, and the lease positions all taken, because the smart one took a risk that it would work, and god the good areas years ago. Too late for you and I, and too late to invest with those gains. Just like the founders of big tech, they had the idea, got rich, and you get to buy their idea at a premium with the risk it will lose money going forward. Make no mistake however, there has and will be good money made on shale production cashflow, it just all may be spoken for already.

  11. raxadian says:

    Raise your hand if you saw this coming ages ago.

    What I am surprised of is that it took so long. Shale oil is only profitable if petrol oil is like 120 bucks a barrel.

  12. njbr says:

    Shale oil is a “last resort” product introduced a couple of decades too soon.

    The conventional oil producers are eagerly anticipating the inevitable rise of their prices when the US has burned through their product in a decade or so.

    Not to mention the economic (and ecological) crimes of flaring of natural gas and destroying fossil water sources.

    • Michael Fiorillo says:

      Yes, the thermodynamic, environmental and economic folly of this entire model is criminal on an immense and irredeemable scale.

  13. Danny Ross says:

    My family owns 36 acres in SW Louisiana. There is likely petroleum under it. In fact there have been producing wells in the area for over 50 years.

    We have been approached to sell mineral rights several times in the last 30 years. We have never sold, because we do not want the property trashed; drilling is a very dirty business.

    When the price of petroleum products is high, interest is high. Then drilling increases, production increases, then the price falls. That is just the way the oil business is.

Comments are closed.