Oil Price Correction Triggers Shale Meltdown

Second oil bust in five years – or phase 2 of the same oil bust – exacts its pound of flesh.

Shale-oil driller Halcon Resources today announced in a filing with the SEC that it would file for pre-packaged Chapter 11 bankruptcy in Houston on or before August 7, after about 67.3% of the holders of its unsecured notes agreed to take a haircut of $750 million. This was Halcon’s second bankruptcy filing in three years.

The original shareholders got wiped out ahead and during the first bankruptcy filing in 2016, felled by negative cash flows, high debts, and the oil bust. In the process, $1.8 billion of Halcon’s debt was eliminated. In return, these stiffed debt holders were given 96% of the newly restructured company’s shares. Now, in the second bankruptcy, those new shareholders will also be wiped out, and the current debt holders will become the shareholders in the newly restructured company.

A month ago, it was oilfield services giant Weatherford International that filed for pre-packaged Chapter 11 bankruptcy in Houston, after it had entered into a restructuring support agreement with holders of 62% of its unsecured notes. Back in 2014, before the oil bust hit, the company had 67,000 employees, now down to about 26,000.

The reorganization plan allows Weatherford to shed $5.8 billion of its $7.6 billion in long-term debt. Existing shareholders had already gotten wiped out due to the collapse of the share price. Now the stiffed debt holders will get 99% of the newly restructured company’s shares. And the company will get new credit and loans of $1.75 billion to be able to operate.

The amounts of money that have been drilled into the ground in the US oil patch are huge, but as long as new investors kept coming in to bail out old investors in these permanently cash-flow negative but capital-intensive operations, the equation worked. But it is getting increasingly difficult to find these new investors.

Last week was particularly ugly for investors in the US shale patch as the shares of a number of shale oil companies plunged, following terrible earnings and cash-flow reports. Here is Nick Cunningham on the shale meltdown:

By Nick Cunningham of Oilprice.com:

It was a rough week for the U.S. shale industry. A series of earnings reports came out in recent days, and while some drillers beat expectations, there were some huge misses as well.

Concho Resources, for instance, saw its share price tumble 22 percent when it disclosed several problems at once. Profits fell by 25 percent despite production increases. Concho conceded that it would slash spending and slow the pace of drilling in the second half of the year.

It also said that one of its projects where it tried to densely pack wells together, which it called “Dominator,” the results were not as good as they had hoped. The project had 23 wells, but production disappointed. The “30 and 60 day production rates were consistent with our other projects in that area, but the performance has declined,” Leach said. So, the company will abandon the densely packed well strategy and move forward with wider spacing.

In the second quarter the company had 26 rigs in operation, but that has since fallen to 18. At the start of the year, the company had 33 active rigs.

“We made the decision to adjust our drilling and completion schedule in the second half of the year to slow down and not chase incremental production at the expense of capital discipline,” Concho’s CEO Tim Leach told analysts on an earnings call. He said the company’s aiming for “a free cash flow inflection in 2020.”

The company reported a net loss of $792 million for the first six months of 2019. As Liam Denning put it in Bloomberg Opinion: “It’s sobering to think that Concho, valued at more than $23 billion in the spring of 2018 and having since absorbed the $7.6 billion purchase of RSP Permian Inc., now sports a market cap of less than $16 billion.”

The reason these results are important is because they may not be one-off problems for individual companies, but are more likely indicative of the problems plaguing the whole sector. “There is little doubt this is a big event for the sector and a brake of this nature will create lasting impact,” Evercore analyst Stephen Richardson wrote in a note, referring to Concho’s poor results.

“How companies still, after all these years we have wailed and gnashed our teeth, manage to over-promise and under-deliver, remains an infuriating mystery,” Paul Sankey wrote in a note for Mizuho Securities USA LLC.

Whiting Petroleum had an even worse week. Its stock melted down on Thursday, falling by 38 percent after reporting a surprise quarterly loss that badly missed estimates. The company announced that it would cut its workforce by a third.

According to the Wall Street Journal and Wood Mackenzie, a basket of 7 shale drillers posted a combined $1.58 billion in negative cash flow in the first quarter, four times worse than the same period a year earlier.

While the results, in many cases, were bad, the declines in share prices were hugely amplified by the announcement of new tariffs on China, which caused a broad selloff not just in the energy sector, but for equities of all types. Here is a sampling of how the share prices of some oil companies fared on Thursday:

  • Whiting Petroleum -38 percent
  • Concho Resources -22 percent
  • Pioneer Natural Resources -7.5 percent
  • EOG Resources -5.5 percent
  • Devon Energy -6.8 percent
  • Continental Resources -7.8 percent
  • Royal Dutch Shell -6.1 percent
  • Chevron -2 percent
  • SM Energy -9.0 percent

But the poor quarterly performances were true before President Trump took to twitter. Even with oil down and stocks perhaps looking cheap, “it’s hard to call it a contrarian opportunity right now,” Matt Maley, chief market strategist at Miller Tabak, told CNBC. “This group has really been dead money most of this year.”

Investors are clearly souring on the sector. As Bloomberg notes, speculative positioning from traders fell to the lowest level since March 2013, a sign of “investor apathy” towards crude oil and energy stocks.

While shale E&Ps languish, the oil majors are not slowing down. Exxon said that its oil production rose by 7 percent, driven by the Permian. In fact, its production from the Permian rose 90 percent in the second quarter from a year earlier. Earnings dropped by 21 percent, however, and the company cited lower prices and poor downstream margins.

But the majors aggressive bet on U.S. shale is a sign of the times. Small and medium drillers are getting hammered and seeing their access to capital close off, which is forcing budget cutbacks and otherwise leading to steep selloffs in their share prices.

The majors, on the other hand, are only in the early stages of a multi-year bet on shale. They can stomach losses on individual shale projects for years, scaling up while they earn profits elsewhere. So, despite the widespread financial losses for the shale sector, it’s not clear that production is set to grind to a halt. By Nick Cunningham of Oilprice.com

Over 170 shale companies have declared bankruptcy since 2015, affecting $100 billion in debt, including 8 bankruptcies already this year. Read… A ‘’Gusher Of Red Ink’’ for US Shale

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  38 comments for “Oil Price Correction Triggers Shale Meltdown

  1. David Calder says:

    Does this count as one of the Bubble Everything popping or is it a lot of leaking gas bubbles that will deflate slowly leaving the slow to respond to take the hit? It seems to me that those with money to invest; the wealthy, pension funds, hedge funds, which have spent the last 10 years piling into whatever paid at least something beyond zero, are now seeing a lot of bubbles about to pop which if that actually happens will wipe out a huge portion of the wealth of the nation.

    • Erle says:

      A leaking gas bubble is in the price of NG. It finished a few cents above 2.00 if I read BBG correctly.

    • nick kelly says:

      Jees! At this rate the Fracking leak will sink the US in a decade all by itself.

    • NBay says:

      To me, the “Wealth of the Nation” was in the strategic oil reserves, oil left in ground , soil banks, Ogalala water, etc, etc ETC. Does everything have to run FN wide open? Especially more ridiculously stupid stuff like corn-ethanol industry? Guess under our system everyone has to have a 40 and a gas guzzler, needed or not, or it all crashes? Green New Deal is only hope left, but how could a bartender’s option be worth jack shit?
      We have EXPERTS!

      We are really really stupid animals collectively, and so are our masters.

  2. Iamafan says:

    Iranian oil to China and “others” causing oil price to drop. Expect action.

  3. Nels Nelson says:

    Oil E & P analyst Art Berman has been saying for years that fracking is not a revolution but a retirement party.

    Gone are the days of Spindletop where you could drill down 1500 feet, puncture the top of a huge underground reservoir and crude would come gushing out at a rate of 100,000 barrels a day for 10 days before it could be brought under control. In those days the Energy Return on Energy Invested or EROEI was 100 to 1. With fracking about 15 to 1. Furthermore much of what is extracted is not crude in the traditional sense.

    The US economy is dependent on cheap oil and the only way to get it is with cheap money. In the words of Herb Stein: “If something cannot go on forever, it will stop.”

    • Jay says:

      On the contrary, the story of Spindletop is quite a good analagy. I can’t do it justice, but in short a technologically advaced well was drilled. By luck it was really good. It made so much oil it flooded the market. Then investors came in and lost their butt on offset Wells. Boom bust boom bust. Lies, tall-tails, and statistic.

  4. Old Dog says:

    “But it is getting increasingly difficult to find these new investors.”

    A sucker is born every min… quarter?

  5. Senecas Cliff says:

    A couple of months down the road when the repo men are pulling up the tow trucks to the bankrupt frackers oil rigs , and at the same time we get a significant disruption in Persian Gulf Oil it will make the Arab Oil Embargo of 1973 look like a picnic. Get your gas cans ( or bike if you really want to be prepared) now.

    • Unamused says:

      Thereby sending WTI to $150/bbl. Call it a price-support program.

      • Senecas Cliff says:

        Oil analysts at the big banks have predicted that such a set of events could drive oil prices up to $300 or even $500 per barrel exploding the oil price derivatives market and popping the “everything” bubble in a big way.

    • Jason says:

      What’s your track record in making such extravagant claims?

  6. Unamused says:

    Does this count as one of the Bubble Everything popping or is it a lot of leaking gas bubbles that will deflate slowly leaving the slow to respond to take the hit?

    It’s another manifestation of a common corporate tax fraud scheme where funds are channeled back to investors but booked as losses, allowing such investors to claim the tax credit. It’s all in the prospectus.

    Oh, don’t be so surprised. It’s not as if it’s illegal or anything.

  7. Nodak65 says:

    the good times have been over in north dakota for making the big bucks in the oil fields. https://bismarcktribune.com/bakken/about-north-dakota-workers-impacted-by-whiting-layoffs

  8. kk says:

    Most of these investors wouldn’t give a penny to a blind beggar but they drill millions away into the ground- surely they see something we are missing?

    • alex in San Jose AKA Digital Detroit says:

      They’re afraid they might have to count that penny in their taxes, but they can use those holes in the ground as a tax write-off.

  9. Jason says:

    XOP came within a few cents of a massive double bottom today.

  10. Deli guy says:

    So shale having problems sounds bullish for WTI oil to me. Less frackers= less supply, means oil will spike.

    • Wolf Richter says:

      Last time (2016), as soon as the price of WTI started coming off the lows, new money was pouring back into the sector, and production exploded to current record levels, and the price collapsed again (starting last fall). So what you need to watch is the money-flow. A few months after the $$ floodgates open, production surges. The sector can ramp up with blinding speed, and crush any rally.

      • Traders have been buying the lows in anticipation of a hyperinflationary turn. Some of that is disbelief in continued low interest rates, and the oversold breakdown in the corporate bond sector. One sidebar is the Iran/China oil deal which is considered bearish, and seems more likely after China’s stealth devaluation. Too much oil, the dollar is too high. Portends a global depression if it continues.

    • Nels Nelson says:

      No. A spike in oil prices will trip the circuit breaker on the US economy and it’s lights out.

      E.G. The auto industry is dependent on the sale of gas guzzling trucks and SUVs because in the words of Willy Sutton that’s where the money is. A spike in gas prices will kill the sales of these profit generators. These profits are necessary in order for the auto manufacturers to invest in electrification.

      • NBay says:

        Wolf- please delete un thought out rant…I lost it. Thanks.
        You can leave short starter rant above in, if you want.
        Trump Clinton Trump Clinton.

  11. JFP says:

    I got a cold call yesterday from someone I’d never heard of asking me to invest in his two oil drilling projects. That has to be a sign that the crash is coming.

  12. David Q Hall says:

    At the rate they are building oil pipelines out of major oilfields, they were not all planning to go bankrupt. Exxon is a very large company as is Chevron, BP and Total. They have survived numerous downturns. Many little minnow size companies might not survive. Shell has diversified into producing electricity. The oil and gas majors may do refining, chemical production and oil or natural gas transport too. They used to build liquid natural gas import facilities in US ports. Now they are building LNG liquification and export facilities.

  13. Lou Mannheim says:

    “capital discipline”

    Ugh, I hate corporate-speak.

  14. nick kelly says:

    I see WR is advertising Asian beauties. God that guy has a lot of businesses. Or is the ad there because of something I did?

    • Wolf Richter says:

      Delete your browsing history.

      But tbh, I’d rather look at this type of eye candy than some of the other stuff I see :-]

    • NBay says:

      HaHa! I use Guest account for Asian beauties. All gets deleted when I quit.
      Am trying to build confusing picture of myself, so I get strange ads. Hey, does anyone else think Ken Fisher got his photo retouched to get rid of strange hourglass face look? He’s almost always here, and a short safe click.

  15. Erle says:

    Is this a good time to pile into LNG exporters because their gas is so cheap, or will nobody be able to afford it when it is cheap?

  16. Otishertz says:

    Be funny if oil barrons tried top convind the public that oil is dinosaur juice fossil fuel.

    It has been known for a while that oil is a renuable resource. Look uo Abiotic Oil or the Russian-Ukranian theory of abiotic oil genesis.

    Oil is routinely found far beneath the strata where dinosoars and evven plankton supposedly was and spent oil wells have a mysterious way of flowing again.

  17. Humble Oil says:

    Something tells me this little Texas oil story is gonna become a bigger story very soon:

    U.S. refineries, geared to mostly process heavier and medium crudes that are imported from neighboring producers, are struggling to blend the lighter oil efficiently, market sources said.

    “That’s a big structural problem that’s not going to go away anytime soon. We’ve got this mismatch in the country,” Jennifer Rowland, analyst with Edward Jones said.

    “We’ve got refineries that want heavy oil and producers that make light oil.”

    The refineries along the Gulf Coast are not equipped to handle oil that light. It is typically mixed in with other streams to create WTI, but rising volumes of ultra-light oil are forcing changes. Instead, the industry is beginning to separate out oil of different qualities, forming new grades, as Reuters reports.

  18. Sadasivan says:

    Global Trade is low and is falling.Auto Sector in India and some other countries, is in doldrums.These two have to improve for Commodities to rise,except Gold and Silver,which are of course,Money.

  19. OutLookingIn says:

    Oh the horror!
    “China National Petroleum Corp. caught importing Iranian crude”.
    You can’t continually beat someone over the head, then expect them to honor your sanction diktats! Give your head a shake.
    This is all about protecting the US dollar. Iran sells its oil to China for yuan bypassing the US dollar. It than converts yuan into gold bullion via the Shanghai exchange.
    Now China is labelled a “currency manipulator” with more harsher economic treatment that entails. This course of action will have economic boomerang consequences. The old story; you can’t have your cake and eat it to!

  20. Larster says:

    Is the shortage of heavy crude related to our total sanctioning of Venezuela? The “Stache” is on the case.

  21. DR DOOM says:

    The only investment in the energy patch that I know that works is in my cans and tanks of my trucks and equipment. I don’t know jack about how the oil patch will go. I do know this is one patch this hillbilly aint playing in .

Comments are closed.