Fracking Blows Up Investors Again: Phase 2 of the Great American Shale Oil & Gas Bust

Including billionaires who thought they’d picked the bottom in 2016.

By Wolf Richter for WOLF STREET.

In 2019 through third quarter, 32 oil and gas drillers have filed for bankruptcy, according to Haynes and Boone. Since the end of September, a gaggle of other oil and gas drillers have filed for bankruptcy, including last Monday, natural gas producer Approach Resources. This pushed the total number of bankruptcy filings of oil and gas drillers since the beginning of 2015 to over 200. Other drillers, such as Chesapeake Energy, are jostling for position at the filing counter.

Chesapeake has been burning cash ever since it started fracking. To feed its cash-burn machine, it has borrowed large amounts and has been buckling under its debt for years, selling assets to raise cash and keep drilling for another day. But its debt is still nearly $10 billion. Its shares [CHK] closed on Friday at 59 cents.

On November 5, in an SEC filing, it warned of its own demise unless oil and gas prices surge into the sky asap: “If continued depressed prices persist, combined with the scheduled reductions in the leverage ratio covenant, our ability to comply with the leverage ratio covenant during the next 12 months will be adversely affected which raises substantial doubt about our ability to continue as a going concern.”

In early 2016, during Phase 1 of the oil bust — which had started in mid-2014 — Chesapeake had already used the threat of bankruptcy to push its creditors into accepting a debt restructuring. At the time, it was the second largest natural gas producer in the US.

The debt restructuring reduced its debt burden somewhat and pushed maturities out, which then allowed it to borrow new money from new investors with a series of bond sales. This coincided with the Wall Street floodgates reopening to the oil and gas sector, when PE firms, hedge funds, and distressed-debt funds piled billions of dollars into the sector, and many of the oil and gas drillers were able to raise more cash to burn.

Chesapeake’s series of bond sales that it then undertook included, in January 2018, $1.25 billion of senior unsecured convertible notes with a coupon of 5.5%, due in September 2026. It issued those bonds at a discount, but by July 2018, a few months before Phase 2 of the oil bust set in, the bonds were trading at 103 cents on the dollar. On Friday, the last trade was at 45 cents on the dollar, giving these bonds a yield of over 21% (via TRACE, FINRA’s Trade Reporting and Compliance Engine):

Other exploration and production (E&P) companies have seen their shares get crushed as reality began to re-set in.

Whiting Petroleum shares [WLL] had spiked to $370 in August 2014, when the oil bust was setting in. By the trough of Phase 1 of the oil bust, in February 2016, its shares had plunged to $14. Then new money started flowing into the sector, and its shares rallied to $55 by August last year. Then Phase 2 of the oil bust set in, and after some disastrous earnings reports, its shares closed on Friday at $5.34.

In June 2018, Whiting sold $1 billion of callable senior unsecured bonds, with a coupon of 6.625%. The next call date is in October 2025. Through September 2018, the notes were trading at 103-104 cents on the dollar. Then Phase 2 of the oil bust took its toll. On Friday, the bonds closed at 57.8 cents on the dollar, at a yield of 18.375% (via FINRA’s TRACE):

The S&P U.S. High Yield Corporate Distressed Bond Index tracks bonds that trade at a yield that is at least 10 percentage points higher than the equivalent Treasury yield (“Option Adjusted Spread” of 1,000 basis points). Chesapeake’s bond illustrated above, trading at 21%, and Whiting’s bond trading at 18.375% qualify for this index with flying colors. Of the 182 constituents in the index, many are energy bonds. Since November 2018, the index has plunged by 28%:

Now there are stories circulating of how billionaires, who in 2016 believed the hype that the fracking bust was over, have gotten tangled up and lost tons of money on their bets. Bloomberg recounts one such story, of the brothers Farris and Dan Wilks in Texas.

In 2002, they’d turned their stone-mason expertise into Frac Tech Holdings. Chesapeake, the fracking pioneer with the collapsed shares and bonds above, acquired a 25.8% state in 2006. They became billionaires in 2011 when they sold the remainder of the company to an investor group led by Temasek Holdings, which is owned by the Government of Singapore, for $3.5 billion. They then bought large swaths of land in five states, becoming the top property owners in Montana and Idaho.

However, not all of their wealth went into real estate. In 2016, the brothers started investing heavily in the fracking industry through their investment company, Wilks Brothers LLC, including oil and gas drillers in the Permian Basin and suppliers, such as frac sand supplier Carbo Ceramics, of which the brothers are the second largest investors.

Back in 2015, Carob Ceramics [CRR] still traded at over $40 a share. By October 2016, shares had dropped into the $6-range. Then the Permian boom started, and in early 2018, shares were trading at $12. But then the long hard decline continued, as demand for frac sand vanished as drillers were running out of cash and cut back on their drilling activity, and on Friday, shares closed at 41 cents.

The brothers also invested $110 million in the above-mentioned natural-gas driller Approach Resources, which filed for bankruptcy last Monday. They invested in Alta Mesa Resources, which filed for bankruptcy in September, and they invested in Halcon Resources, which filed for bankruptcy in August (its second filing, after having already filed in 2016).

Bloomberg notes: “Eight of the 10 biggest holdings in a portfolio spanning more than 50 investments have dropped since June 2018, when they were worth almost $1 billion. In a filing last week, they reported stakes in just seven entities worth a total of only $35.7 million. The combined value of those remaining holdings plunged by $171.2 million, or 88%, since they were initially disclosed.”

The shale oil and gas business has turned the US first into the largest gas producer in the world, and then this year also into the largest crude oil producer in the world. It’s a huge business, with lots of high-paying jobs, not only in the oil field but in technology sectors, including software and hardware, manufacturing of heavy equipment, transportation, materials, and of course construction – ranging from pipelines and housing in the oil field to now partially empty office towers in Houston where, according to JLL, the office vacancy rate in Q3 climbed to an astounding 24%.

The shale oil and gas business, when it’s hopping, is great for the US economy. Its activities feed a significant part of US industrial production, including manufacturing. It pays well, and manufacturing for the industry pays well, and construction for the industry pays well, and the tech components of the industry pay well, and these workers are spending their income on new vehicles and houses and other things, and boost the economy.

Shale oil and gas drilling is awful for the land, water, and the broader environment. But so are all other methods of supplying power and fuel to an economy, including mountain-top coal mining, burning coal, hydro (which destroys entire canyons and rivers), nuclear power (nuclear waste, Fukushima, Chernobyl), even wind and solar power (the “fuel” is free and clean but producing and placing the equipment creates its own problems). When it comes to power and fuel, there are only compromises, some worse than others, and fracking is one of them.

And it’s brutal on investors at prevailing prices. The industry has been cash-flow negative from get-go. The high prices of oil and gas the industry needs to be cash-flow positive are being prevented by prolific shale oil and gas production. Executive compensation packages have been self-designed to reward richly any increases in production, hence no-matter-what increases in production. And investors who believed the industry’s ceaseless hype are now grappling with reality – that their money was drilled into the ground and is gone.

The fear that central banks with low or negative interest rates will be helpless in face of the next economic crisis made it into the Fed’s Financial Stability Report for the first time. Read… Fear of “Reversal Rates” Sets in, Says the Fed

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  102 comments for “Fracking Blows Up Investors Again: Phase 2 of the Great American Shale Oil & Gas Bust

  1. AlbieOK
    Nov 23, 2019 at 8:17 pm

    Hot money burns. Always.

  2. 2banana
    Nov 23, 2019 at 8:20 pm

    At least fundamentals are being used to some degree in pricing these oil, gas and shale producers. And there is/was an actual chance they would make a profit.

    And Uber, Lyft, Tesla, WeWork, Netflix and a host of other dot.comv2 keep chughing along as great cash burning machines. Without a prayer of ever making a profit.

    “And it’s brutal on investors at prevailing prices. The industry has been cash-flow negative from get-go.”

    • roddy6667
      Nov 23, 2019 at 9:40 pm

      These are not investors. They are the same people who blow the rent money at the casino.

    • rhodium
      Nov 24, 2019 at 1:20 am

      “It pays well, and manufacturing for the industry pays well, and construction for the industry pays well, and the tech components of the industry pay well, and these workers are spending their income on new vehicles and houses and other things, and boost the economy.”
      Oil field and construction workers, at least the ones I’ve met, are not known for saving money (and in modern America neither those in these other industries to much extent), so they’ve been a significant source of demand within the economy all thanks to “investors” who gave them these job opportunities because they were chasing after riches in an economy where for many companies the case is, as Musk put it, basically we’d be profitable if customers could actually afford our product… If junk bond yields keep inching upward, something is going to break and everything is going to quickly come crashing down once it starts to dawn on people that many of these so called investments have been mistakes. As an aside, I never understood the compulsive fascination with expensive new pickups among meatheads who pretend to make a lot of money but their hourly pay actually sucks (they often claim liberals are holding back their wages), but I will get a kick out of watching them ride peddle bikes. Could have had the yaris paid off by now buddy!

      • ooe
        Nov 24, 2019 at 8:43 am

        it called…advertising. Maybe you should watch a BBC documentary by the name of “The Century of Self.”

        Also, you should watch sporting events. they sponsored by the …car companies.

        • bungee
          Nov 24, 2019 at 9:10 pm

          i second the suggestion for “Century of the Self”.
          free on youtube.
          its about freud’s nephew and the blending and creation of ‘public-relations’ and advertising.

      • 2banana
        Nov 24, 2019 at 9:19 am

        Will you get the same kicks for the folks driving $80,000 Teslas in exactly the same financial situation?

        Or does your joy of seeing other humans suffer only go along one end of the political spectrum?

        • Zantetsu
          Nov 24, 2019 at 10:39 am

          I too would enjoy it if all of the meatheads driving lifted and/or humongous pickup trucks would lose them in an economic crash, because those kind of vehicle has no place on our roads.

          They are excessively dangerous to other vehicles (especially lifted trucks that put their bumpers pretty much at the perfect height for decapitating other drivers) and the absolutely destroy sight lines of normal vehicles. They also are driven by morons who don’t mind getting 12 miles to the gallon but will cry and complain if the price of gas goes up and they have to actually pay their fair share of the their environmental destruction.

          I don’t have a problem with Teslas because they don’t destroy sight lines and they properly adhere to government safety standards, and their power source is cleaner (I will not be baited into an argument about that — electric is just cleaner, period).

        • Zantetsu
          Nov 24, 2019 at 10:40 am

          Also 2Banana, it’s hilarious that you are ascribing a place on the political spectrum for truck driving meatheads when no one else did. That’s a Biden level gaffe there.

        • Zantetsu
          Nov 24, 2019 at 10:42 am

          Mea culpa, 2banana, I missed where rhodium said that the meatheads would complain about liberals, thus implying they were on the opposite end of the spectrum. So no gaffe from you, only from me.

        • Zantetsu
          Nov 24, 2019 at 10:44 am

          Oh I forgot to mention that those truck driving morons typically can’t park properly either, sometimes because they can’t be bothered to try, and sometimes because their overly large vehicles just don’t fit and yet they stuff them in the spaces anyway. So enraging …

        • w.c.l.
          Nov 24, 2019 at 1:55 pm

          Hey Gang, let’s not forget all them thair yuppie/boomer class folks driving high cost, low-milage battlecrusier sized SUV’s around (lots of them around here). Usually with a cell phone welded to their ear as they go through traffic and intersections.

        • rhodium
          Nov 24, 2019 at 11:40 pm

          I would retort that I do not enjoy watching them suffer. I merely am frustrated that so many would pretend that their purchasing power is greater than it is while grasping for a lifestyle that is not sustainable (so sorry meatheads). Who’s fault is it if anyone’s? That political debate will keep raging but very little the right-wing has done actually helps meatheads. I will continue to maintain that the labor market is producing low paying jobs and forcing everyone else to compete for what’s left in the middle and force down wages in traditional middle class jobs. Yes, 2banana, I wouldn’t feel bad for a wannabe pretend to be rich tesla owner who loses it either. Technological progress and modern capitalism are not without their victims. Increasingly, if you want your kids to be financially stable you don’t tell them to work in a factory, or drive a truck, or work the oil fields, or even be a tradesmen (if you dig into the stats hourly wages for tradesmen are heavily lagging other professions regardless of what they say about shortages). There is a strong element of truth in #learn2code, and it’s increasingly certain that it is no longer a meathead’s world where just grit and gristle can buy you an affordable truck.

      • Bryan Gaddy
        Nov 30, 2019 at 8:49 pm

        I happen to be one of the meatheads, in the sector, who drives a lifted pick-up. I’m not a wage, my salary is in the top 5%, I have a Masters of Science in Energy. I find nothing humorous about the suffering of anyone. I don’t understand why you would find it funny that someone would loose their job and their property.

    • Massbytes
      Nov 24, 2019 at 11:01 am

      Did you miss Tesla’s profit last quarter? Or do we now get breathless over them not profiting the quarters before that? You anti-Tesla people are amazing.

    • NBay
      Nov 25, 2019 at 2:46 pm

      Just noticed today Fin Times had a pay for article on “zombie companies”. Only free part was that a BofA ML study found 582 of them existed at present, and contrasted that to 626 at the peak of the FC… the list and data will cost ya….if it’s even there.

      Moral: Stop bitching about ads here, in fact have some fun playing with them, and painting weird pictures of yourself…..on google leads.com, etc. This site is a spare time activity for most anyway, ya know?

    • char
      Nov 26, 2019 at 12:42 pm

      Netflix makes a fat profit at $30 a month. This is very likely what you will pay for it If you look at the history of cable tv. (Disney will be $35).
      WeWork is a bro version of Regus.Bro’s and making a profit is the problem as bro culture is inherently corrupt.
      Tesla makes a profit if batteries cost half which is likely to happen in the near future.Besides the real reason why Tesla is making a loss is the creation of their version of DENSO. IMHO the right way to handle their highly overvalued stock.
      Uber/Lyft, Profitable if a) fares would double or b) cabbies pay would be half. Neither is likely to happen.for obvious economic reasons.. In that they look like the fracking companies who also need things that are not economically possible (much higher oil price or much lower production cost)

  3. Bobber
    Nov 23, 2019 at 8:28 pm

    Management of troubled companies often use a dog whistle to let smart shareholders know a bankruptcy is coming. They start using the term “stakeholders” rather than “stockholders”. When you hear it, run fast.

    • Wisoot
      Nov 23, 2019 at 11:10 pm

      How perceptive Bobber – it is highly likely there is an insider terminology to look after their own after so much market consolidation into global conglomerates and government interference into hands of less than 100 individuals

  4. GarbageMan
    Nov 23, 2019 at 8:51 pm

    Somewhat related, 220 of the 351 (~63% of the paper, 62% of companies) companies that make up HYG underlying either (or some combination thereof): rated B1 or lower, trade below 90 cents on the dollar, negative cashflows, income/cash below the value of their next bond payment (from latest public available SEC 10k/10q filing).

    You can also see the stress reflected in the B vs BB CDX spread widening and now falling wedge that has been forming since beginning of oct has now been broken: https://i.ibb.co/4g35p0b/credit-spreads.png

    The distribution of them by sector is as followed:
    {
    “LIFE”: 3,
    “CONS”: 3,
    “GASL”: 3,
    “CABL”: 10,
    “LODG”: 1,
    “GAME”: 4,
    “CONG”: 1,
    “GASP”: 3,
    “CHEM”: 3,
    “METL”: 6,
    “VEHL”: 3,
    “OTHI”: 8,
    “PHRM”: 3,
    “unknown”: 2,
    “OTHF”: 33,
    “RETL”: 5,
    “SECS”: 2,
    “OTHU”: 3,
    “OTHT”: 1,
    “HOME”: 5,
    “OTHS”: 26,
    “REIT”: 6,
    “TRON”: 1,
    “FOOD”: 2,
    “AUTO”: 2,
    “HEAL”: 3,
    “AERO”: 2,
    “BLDG”: 4,
    “REST”: 2,
    “PUBL”: 1,
    “TOBC”: 1,
    “FUNN”: 6,
    “MTGB”: 1,
    “MACH”: 1,
    “INFO”: 5,
    “OILG”: 34,
    “OILM”: 2,
    “AIRL”: 2,
    “LEAS”: 1,
    “FDRG”: 2,
    “TELE”: 9,
    “PACK”: 2,
    “HLCF”: 8
    }

    98 of the 335 in LQD (~41% of the paper, ~29% of the companies), have the same factors as above (but instead of B1 or lower, Baa3 [one notch above junk] or lower or have any paper rated junk) follows below (would be ~61% of the paper ~46% of companies if included all Baa1 or lower):

    {
    “CONS”: 1,
    “GASL”: 1,
    “CABL”: 4,
    “GASP”: 3,
    “CHEM”: 1,
    “METL”: 1,
    “PCAS”: 2,
    “OTHI”: 1,
    “PHRM”: 2,
    “unknown”: 0,
    “OTHF”: 13,
    “RETL”: 2,
    “BANK”: 12,
    “OTHU”: 6,
    “VEHL”: 1,
    “OTHS”: 2,
    “REIT”: 6,
    “TRON”: 7,
    “FOOD”: 3,
    “AUTO”: 2,
    “HEAL”: 2,
    “AERO”: 1,
    “RAIL”: 1,
    “REST”: 2,
    “FUNN”: 1,
    “BEVG”: 2,
    “INFO”: 1,
    “OILG”: 17,
    “OILM”: 1,
    “AIRL”: 1,
    “TELE”: 1,
    “HLCF”: 2
    }

    Notice the standout of “BANK” with “OILG” in the “Investment Grade” bucket…

    • Wisoot
      Nov 23, 2019 at 10:56 pm

      That old ‘other category’ trick to obfuscate the truth. Look here to understand.

    • Iamafan
      Nov 24, 2019 at 7:20 am

      Nice. Junk is junk.

      Can’t understand the mystique people put on an ETF wrapper. Maybe it keeps the garbage from stinking like a garbage can.

      • GarbageMan
        Nov 24, 2019 at 8:02 am

        I guess it’s not working well enough cause pimpco and banks like JPM are trying to come up with new schemes to offload the trash under the guise of a “study”[0][1][2]

        Find more comments by searching “19-12_BlackRock_Comment.pdf “, “19-12_Jane\ Street_Comment.pdf”

        [0] https://www.bloomberg.com/news/articles/2019-06-13/citadel-squares-off-with-pimco-over-48-hour-bond-reporting-delay

        [1] https://www.finra.org/sites/default/files/2019-09/19-12_CFA-Institute_Comment.pdf

        [2] From 19-12_BlackRock_Comment.pdf – “Based on our analysis of January 1, 2015 – September 30, 2018 uncapped data, Test Group 1 would subject 3.1% of investment grade and 18.2% of high yield trades to the delay. This equates to 57.5% of investment grade trading volumes and 87.0% of high yield trading volumes. We believe that this represents too large a portion of the market to subject to the delay and we are concerned that the inclusion of Test Group 1 would likely have a detrimental impact on price discovery.”

      • Nat
        Nov 25, 2019 at 1:39 pm

        The ETF wrapper allows diversification. Yes diversified junk is still junk, but that said the diversification does help – when any one company files for bankruptcy in HYG it has less than an 0.5% impact on HYG’s portfolio. If you are a major investor this isn’t useful because you have the money to diversify your own junk bond holdings, but if you are retail investor you couldn’t possibly afford to safely diversify across the US junk bond with all of your capital, let alone only a modest portion of it.

        Sure it is all junk and when a bond rout blows up the junk bond market those with money in HYG will be fried. But that is true of any investment in a market domain that suddenly blows up. Junk bonds are a great investment when the fundamentals of the economy are good and ETFs like HYG give retail investors good exposure and diversity to that market on a budget with high liquidity – this is valuable. Sure Retail investors can burn themselves badly with it when the credit cycle rolls over, but people can accidentally and literally burn themselves with gasoline too, that doesn’t mean gasoline has no value and shouldn’t be sold to the consumer, it just needs the proper warnings and the proper handling. In its context with proper use it is a useful and valuable product.

      • NBay
        Nov 25, 2019 at 3:06 pm

        Like the garbage can analogy.

        Face it, when a lot of people think the same way about anything, ETFs, diversifying, politics, consumer needs vs wants, desired self-image, and on and on and on, it is low hanging fruit ripe for creative plucking.
        Shoving it all in a nice looking can along with plenty of cheap, useless garbage is a great method.

        Auto industry is one of the best at this game, we are far, far, past mere reliable human transport…..ridiculously so.

  5. Anthony Aluknavich
    Nov 23, 2019 at 9:08 pm

    We have been “fraccing” wells since the beginning of the U.S. oil industry, although we did it to vertical wells using cruder methods (how else would one break the rock formations to get at the oil?). Horizontal drilling made well bores more efficient in a better position in getting at the gas and oil left behind from vertical drilling methods. Fraccing pressures are higher now and more material is used (water, diesel, etc).

    Oil companies have been boom and bust types for a long, long time. Nothing new here either. It’s a commodity.

    I had 35 years in the oil & gas business and now I’m out of it and happy to be….retired!

    • roddy6667
      Nov 23, 2019 at 9:49 pm

      I worked in the water well business for a year back in 1978. One company in CT used fracking a lot. When they reached a depth with a marginal flow, they would stop drilling and move the machinery to the next site. They would frack (pressurize) the hole and it would increase the yield every time. They also used this for homeowners whose wells could no longer supply the gallons per minute necessary. A quick fracking almost always fixed the problem.

      • Iamafan
        Nov 24, 2019 at 7:25 am

        I think I had one of these cheap construction grade Wells when my house was new here in CT. It suddenly stopped working and we had 2 babies at that time. What a disaster. I had a new well dug and paid a fortune for several hundred feet. It was one of my best investments. Usually, the old reliable methods work. No shortcuts.

        • RD Blakeslee
          Nov 24, 2019 at 10:27 am

          Almost never mentioned these days: Ordinary rainwater as a domestic household water source.

          We have been happily using our cistern exclusively for our water, since 1977.

        • Iamafan
          Nov 24, 2019 at 11:55 am

          @R D Blakeslee

          I actually have a large pond (common here in Glacial Lake formed Connecticut) in my property. I used to pump water out of the pond to water my lawn. But in recent years, the pond’s water level would go so low, the I stopped pumping. I was thinking where the Fire Dept. would get water in case of a fire. We don’t have fire hydrants here.

          Maybe it’s global warming.

        • NBay
          Nov 25, 2019 at 3:33 pm

          RD-People usually have no idea how much rainwater roofs can collect. Even in dry CA (appx mar-apr-may to oct-nov-dec, you never know) I got by without a well off grid for a long time using hoses and $10 55 gal bbls at fruit trees (a 250, later added two 1350s) just fine before I had money to drill a well.
          Also that fracking water wells to get more seems stupid, (never heard of it till just now) as you are really just putting in a tank underground. Static levels and knowing your recovery rate is the whole game.

    • Paulo
      Nov 23, 2019 at 10:56 pm

      As per Anthony’s comment, if the price rises a new scramble to produce keeps pace just in case people forget what a bust looks like. There always seems to be investors.

      Yes, retirement is great as long as one stays busy doing meaningful activities. Glad you are enjoying it.

    • Wisoot
      Nov 23, 2019 at 10:58 pm

      Ever drink a glass of water from the rivers running above those horizontals?

      • California Bob
        Nov 24, 2019 at 1:01 pm

        I haven’t drunk water from any river (or lake) for decades, though I used to when backpacking. Giardia is pretty much everywhere:

        https://www.cdc.gov/parasites/giardia/index.html

      • California Bob
        Nov 24, 2019 at 1:02 pm

        ps. When backpacking, I used a filter, even when bathing.

  6. Old Timer
    Nov 23, 2019 at 10:02 pm

    Great info, thanks again, Wolf. After reading the article and then visiting u.s. debt clock, the similarities between “the greatest economy ever,” and fracking, should at the very least qualify them to have the same last name, and better yet, the same birth date (ie. twins).

    • Wisoot
      Nov 23, 2019 at 11:01 pm

      You wont find a Gen Z investing in fracking

      • jsm976
        Nov 24, 2019 at 1:01 am

        It’s very interesting to see how much Gen Z seems blocked into causes. Some of which I support strongly. Where does the “money” that’s passed on go?

  7. Nov 23, 2019 at 10:12 pm

    The money went into my humble pockets too,
    in the form of cheap fuel,
    not just into the ground.

    • Nov 24, 2019 at 1:03 am

      Yes, investors have been subsidizing gasoline and diesel, and all kinds of other things. Just like investors have been subsidizing Uber rides.

      • Iamafan
        Nov 24, 2019 at 7:27 am

        What happens when working capital dries up?

        • doug
          Nov 24, 2019 at 9:20 am

          A greater fool has been showing up, so far…

        • Nov 24, 2019 at 10:30 am

          Iamafan,

          See the bankruptcies listed in paragraph 1 and further down when discussing the Wilks brothers’s investments in companies that went bankrupt recently.

          If you run out of working capital and cannot find new investors or lenders, you can try to sell assets, but generally those assets are already used as collateral, and often that sale won’t even fully pay off the debt backed by that asset. So these companies are in a really tough spot when investors refuse to throw more money at them.

        • Iamafan
          Nov 24, 2019 at 12:30 pm

          Wolf, I did read the whole article and the Bloomberg link. I think my question was not so clear. Are these frackers in bankruptcy restructuring? How are they still getting the money to live another day? The other day, I read Sam Zell was buying distressed oil assets (at rock bottom prices). What could these guys be seeing?
          What oil price levels are they dreaming of.

        • Nov 24, 2019 at 12:50 pm

          Iamafan,

          “What could these guys be seeing?” Same thing these guys were seeing in 2016 when they bought these assets at rock-bottom price, and that are now getting wiped out.

          Fracking will continue to burn investors until the price of oil and gas is high enough. The price was barely high enough briefly last year. But the problem with fracking is that it can ramp up production at lightning speed, as we have seen, as soon as money flows into it, which will cause the price to collapse again.

        • Gandalf
          Nov 24, 2019 at 2:11 pm

          Iamafan,

          Sam Zell is not your traditional investor. It’s more of his standard vulture capitalism, like his destruction and dismantling of the Tribune Company. He screwed just about everybody in that one, employees, shareholders, bond holders, etc., but still came out of it making money. That’s why he calls himself the “Gravedancer”.

          In reading about his investments in “oil and gas assets”, what he really is doing is giving money to distressed oil companies to continue drilling while demanding the first dollars of all the revenue that flows from that drilling. So, no matter what the oil and gas prices are, he’s going to make money. The oil and gas companies are going to get screwed, the bondholders and stock shareholders will get screwed, but Sam Zell will get his money.

        • Gandalf
          Nov 24, 2019 at 5:59 pm

          P.S.
          More on Zell – his investments are set up as Drillco deals

          https://www.forbes.com/sites/debtwire/2018/02/16/oil-players-pump-drillco-deals-as-lower-risk-bet-on-sector-recovery/

          These just provide money for drilling new wells in return for first dollar returns on revenue from production from those wells. This grabs money away from the companies’ other investors and creditors and existing bondholders.

          Fracked wells generally sharply decline in output after merely THREE years, and new wells have to be drilled constantly to generate continued revenue. It’s like sharks that have to keep swimming to breath

          These are horizontal drills thru the shale formation and generally extract from a narrow band around the horizontal drill. New wells are usually drilled in series close by to the spent wells

          So, you can see where this is headed. Drilling and production costs have in general gone sharply down in the fracking industry. Drilling right next to a proven but spent well with all the infrastructure (piping, storage tanks, roads) in place is almost guaranteed to produce good revenue for three years, which the Drillco deals grab first.

          The company gets to show this revenue on its stock and bond filings, but everybody, especially bondholders, will be behind the Drillco deals in getting any of this money.

          Zell is the ultimate vulture capitalist. At age 78, he’s not waiting around for the next oil price spike

      • RD Blakeslee
        Nov 24, 2019 at 10:32 am

        Amen.

        I just invest in my own enterprise and watch “investors” as that term is usually understood, subsidize my real capitalization and consumption.

      • Nov 24, 2019 at 12:17 pm

        The Feds QE low rate policy made the US an energy independent nation, and now with LNG exports we can subsidize Japan and securitize Europe. I doubt that was their energy policy but it worked out that way. If consumers still pay $4 for gas-oline to benefit our allies, and we can extricate ourselves militarily from the ME, is it worth it? While the benefits at the pump are not evident, muni gov uses cheap CNG to keep buses and trash trucks moving, and your bills lower. Uber should use CNG. So let’s build a power plant 1000 miles away, lose half the power in transmission, maintain and expand the grid, to allow delivery to an EV storage battery which costs $20K and is a pollutant source in itself, when we could just put the NG into the car. The insanity continues.

    • RagnarD
      Nov 24, 2019 at 7:08 am

      Which is a setup for the rug getting pulled out from all the marginally employed that rhodium mentioned above…driving $40k-$70k SUVs / pickups that get 15mpg.

      How do rural Americans, who have to drive significant distances, stay mobile in a hollowed out / low wage / high unemployment economy, driving 15mpg vehicles when gasoline prices spike back over +$4/gallon?

      • Frederick
        Nov 24, 2019 at 9:12 am

        They don’t or they learn to carpool Or they could just buy one of those e- pickups from Musk

        • RD Blakeslee
          Nov 24, 2019 at 10:37 am

          How about the rural guy who fuels his 1995 Cummins diesel pickup with homemade diesel fuel “refined” from waste local restaurant cooling oil?

        • RD Blakeslee
          Nov 24, 2019 at 10:40 am

          Post below: “cooling’ should be COOKING.

        • Zantetsu
          Nov 24, 2019 at 10:49 am

          Who cares about him Frederick? He’s one in a million and irrelevant.

        • Zantetsu
          Nov 24, 2019 at 10:49 am

          Sorry my reply was meant for RD Blakeslee not Frederick.

  8. randy
    Nov 23, 2019 at 10:13 pm

    New York State looks pretty good. Get all kinds of Gas from Penn, and retains a decent water table.
    Ya got to love, the Oil Co’s, Mr Hainey approach,playing the investor like the greedy sucker he is…… all the way to Chapter13, with the potential of a brief stopover at the Carnival Cruise Port…. of Chapter11.

    • Michael Fiorillo
      Nov 24, 2019 at 6:16 pm

      Those protections are priceless, since New York State is also the water tower of the Northeast, with headwaters feeding the Great Lakes/St. Lawrence, Hudson, Delaware, Susquehanna and Housatonic watersheds. Its waters drain from the Gulf of St. Lawrence, to Long Island Sound, south to Chesapeake Bay.

  9. Wisoot
    Nov 23, 2019 at 11:17 pm

    To conclude hydro energy destroys is incorrect. China’s canyon’s and soon Tanzania were mans decision to destroy however wave and tidal and river offer non destructive opportunities. See the Zimbabwe empty drought dam for future trends. Climate makes these projects risky and unreliable.

  10. Matthew Brandley
    Nov 23, 2019 at 11:31 pm

    McDermott is also next been reading they stopped construction on new international hq. Vendors not being paid

    • Wisoot
      Nov 24, 2019 at 7:43 am

      Interesting share Matthew Brandley.

      Nov 5 2019 – new CFO – the goodwill on the balance sheet needed adjusting – Thomas Cook sent a quiet shockwave through the spines of all qualified chief financial officers around the world. New game – how much of a buddy is your auditor?

      Live analytics in the board room should be requisite. Non Execs would soon clean out the chaff.

  11. Tyson Bryan
    Nov 23, 2019 at 11:40 pm

    “The industry has been cash flow negative from the get go.”
    The further question is; how much of it is energy flow negative ? That is, where KWH in exceeds KWH out.
    Negative energy flow should strip the petro dollar of any constructive pretense to being an oil / energy backed currency system in the future.
    No worries – the USD can still bully its way to success by other means.

    • RagnarD
      Nov 24, 2019 at 7:44 am

      Regards the USD:
      If ur a foreign (or even domestic) hard asset producer, why would u sell / exchange your depleting, essential product for the infinitely reproducible / intrinsically worthless USD?

      If was head of a national producer, I might sell for USD at point of sale, but I would definitely be converting that into gold / silver ASAP to avoid getting strung up by my countrymen a few years hence, when even the man in the street starts questioning why I was trading the Crown Jewels for toilet paper.

      • Frederick
        Nov 24, 2019 at 9:16 am

        No doubt Gold and Silver will be the last man standing in the currency world when everything goes fagazzy Get them while they are still available and on sale thanks to the FED

  12. Old-school
    Nov 23, 2019 at 11:41 pm

    There are so many businesses in the world I have never been tempted to invest in one that wasn’t making money and unless it’s a special case they had better be paying me at least half the earnings in a dividend.

  13. MC01
    Nov 24, 2019 at 3:52 am

    I am honestly amazed at how easily investors nowadays are easily swayed by what I can only call the tiniest slice of yield.

    That Cheasapeake Energy was able to sell a 8-years unsecured bond with just 5.5% at 90¢ just two years after somehow managing to cajole creditors into a painful debt restructuring deal redefines the phrase “crazy risks for little or no compensation”. And those who paid over 100¢ for those bonds need to have their heads checked.

    For those who have problems with modern finance jargon “senior unsecured bonds” means that there’s no collateral backing these bonds. In case of a bankruptcy (which looks increasingly likely) it means those holding these bonds get a dib at what’s left after senior secured creditors have been paid off. The only consolation for these chaps is that “the poor bloody infantry” of the financial world, the unsecured junior creditors (which often include vendors) will be pushed one step to the back.

    Cheasepeake bonds have been ignominously demoted to D (imminent risk of default) by rating agencies, and it wasn’t some sudden decision as they had long resided at the low end of the junk bond spectrum.
    In short bondholders had been warned but still lived in cuckoo land until they started running around with their hair on fire.
    Call me a sadist but I find the spectacle highly amusing.

    • Cynic
      Nov 24, 2019 at 5:48 am

      Far better to be the ‘Laughing Philosopher’, as in the old paintings, than the weeping one……

      • MC01
        Nov 24, 2019 at 11:06 am

        Democritus, if my memory serves me right known as the Laughing Philosopher for “laughing at human follies” according to my professors at the lycée.
        And if my memory serves me right he was also much beloved by students because of his postulated vast body of work only a few fragments have survived. ;-)

    • fracker
      Nov 24, 2019 at 7:39 am

      2-3 years ago these Fracking ETF’s and fronts were paying 5-10% dividend yield, I think often they’re paying yields with borrowed money, which is always a VERY BAD SIGN

      Trouble today of course is that when oil prices go down, there is no hope of a profit, and when QE started getting cut back a few years, and when interest rates rised, these frackers got hurt,

      I think most people are are long out of this stuff, I know I cleared of my portfolio 1-2 years ago, just like REIT’s when interest rates were lowest lots of people went to this stuff to get the 7% dividend, now your lucky to get your principal back.

      • Iamafan
        Nov 24, 2019 at 12:20 pm

        So I need to ask a very important question. How much of the Fed’s Repo is really flowing out to Frackers and CLOs ? They might be 2-3 steps removed.

        Last week’s Fed Balance sheet printed only 199.159 billion. [I actually overstated my projections because I added one repo that already “expired”.] If you look at the bigger picture, 410.472 billion was actually USED throughout the week. In addition the Fed bought more than $15 billion in T Bills. So, we go through almost half a trillion bucks a week and no one really knows where this money is being used for. No wonder we can keep zombies alive.

        • Raw trader
          Nov 24, 2019 at 1:12 pm

          And somebody please explain this to dummies like myself who don’t understand the financial plumbing game. Has it become common knowledge that this repo funding is taking place to support a major bank or banks that are in deep due to shale investments?

        • Bobber
          Nov 24, 2019 at 5:03 pm

          Raw Trader,

          I don’t know. It seems plausible to me the repos are not addressing immediate credit risks, but something just as bad. The Fed may be buying the treasuries because the government is now issuing $1-$2T of them per year and nobody (aside from the Fed Reserve) is willing to buy a higher amount of them at today’s extraordinarily low interest rates.

          I saw an article the other day saying somebody traced a specific treasury bill cusip through the system to discover that the government issued the treasury the same day the Fed purchased it. We are now experiencing direct debt monetization, a.k.a. money printing, to fund government spending.

        • Andy Fanter
          Nov 24, 2019 at 8:38 pm

          Raw Trader, in the “greatest economy ever” I will list a few areas where banks might have lost money. Fracking, coal industry, agriculture, retail closures, and auto loans. The FED tried pulling cash out of system and forced to put more money in. Banks getting their loan margin squeezed as FED lowers rates, a few industries having problems, and my opinion: there is a weak bank, too.

    • HR01
      Nov 26, 2019 at 1:45 pm

      MC01,

      You’re not alone with the utter amazement at the headlong chase for yield. This observer chalks it up to the intended ‘unintended consequences’ of CB money laundering.

      Someone else on this thread mentioned the iShares iBoxx Investment Grade ETF (LQD). 50% of the portfolio is rated BBB.

      Has been nearly three months since Moody’s downgraded Ford to junk status. What do S&P and Fitch have to say? Crickets. They know if either one of them confirms Moody’s junk rating this risks triggering a selling panic in Ford’s bonds to say nothing of a possible stampede out of IG paper in general.

      And so the pretense continues.

  14. bb
    Nov 24, 2019 at 5:45 am

    Fracking hell !!

  15. Big John
    Nov 24, 2019 at 8:09 am

    Rich Dad Robert says he owns oil wells. And is making a fortune .

  16. Rat Fink
    Nov 24, 2019 at 8:49 am

    Here’s a message:

    If there is so much cheap oil left to extract then WHY are we sucking the dregs out of the carpet (fracking)… why are we drilling miles beneath the sea… why are steaming oil out of tar

    OPEN YOU EYES. We are absolutely screwed

    • MC01
      Nov 24, 2019 at 10:56 am

      Private James Frazer, is that you?

  17. Tom Abeles
    Nov 24, 2019 at 9:49 am

    what is the projected outcome to the flow of gas and oil from fracking?
    what does it mean for the US position, globally in the market?
    what does it mean for gas/oil prices in the US?

    • Nov 24, 2019 at 10:00 am

      Depends who you ask.

    • A
      Nov 24, 2019 at 11:10 am

      EVs are fundamentally a better product than combustion engines. And within 5 years renewable energy sources are predicted to be cheaper than fossil fuels.

      Soon Oil will be a worthless black liquid.

      • California Bob
        Nov 24, 2019 at 1:32 pm

        “Soon Oil will be a worthless black liquid.”

        For a more realistic prediction:

        https://oilprice.com/Energy/Energy-General/Most-Energy-Will-Come-From-Fossil-Fuels-Even-In-2040.html

        • Andy Fanter
          Nov 24, 2019 at 8:28 pm

          This year in the US–17 million new autos sold, around 2% electric. 250,000 new construction machines, 100,000 ag machines new ( and ag in a recession ), and electrics less than 1%. Upgrades are needed for electrical grid–who will pay? A car battery that can go 400 to 600 miles in any weather condition needed. Charging stations needed.
          Windmills and solar will play a part, but more power plants will be needed to provide the surge in power needs at night. Are there enough lithium and cobalt supplies for batteries? ( This sounds like is there enough oil? Natural gas?) Power lines, charging stations equal more wire. Will there be enough steel and copper? The natural resources get mined by big machinery from Caterpillar and Komatsu—most of it runs on diesel, but there are some large electric mining shovels. I am not anti-electric, just looking at future needs to make it happen.

      • Kevin
        Nov 30, 2019 at 8:51 pm

        Why has no wind turbine or solar panel manufacturer ever powered their entire production from the generating technologies they make?

  18. Bruce Walker
    Nov 24, 2019 at 10:36 am

    All markets are 2 friends and ab stranger. Even billionaires are strangers.

  19. A
    Nov 24, 2019 at 10:56 am

    The shale bust is one of the most surprising events in recent economic history, given we were all worried about peak oil and gas about 5 years ago.

    Equally amazing the energy bust combined with the manufacturing recession from Trump’s policies combined with dotcom bust 2.0 hasn’t taken down the US economy… Yet.

  20. DR DOOM
    Nov 24, 2019 at 11:30 am

    This ain’t a problem if you are in the fed club . Club members can drag their roadkill to the repo window where it’s as good as gold as collateral . If you are a club member you get to hold the dollar during the day and I get to hold it during the night . Bingo , we now have two dollars the next day. If repo does not do the trick.the Fed can pull something else out of their sh-pfing,pfing . (Sh-pfing ,pfing is a Max Keiser invention ) . The Fed is only accountable to its parasitic club members . The Fed considers the fiat dollars we earn to feed and clothe ourselves as a liability , by extension so are we. George Carlin said its a big club and you ain’t in it.

  21. Peter J Stubben
    Nov 24, 2019 at 12:02 pm

    Gas is clean (relatively speaking of course), green, plentiful & cheap. Fracking technology (T/U George Mitchell) has leapfrogged the US back as a primary producer, but Wolf doesn’t analyze the other side of the equation — demand — as Trump is quid-pro-quo’ing the Germans & the others to import less Russian gas and more US gas. Very tough…and, in addition, states like the glorious Empire State are trying to ban natural gas and obstructing new pipe delivery into the City to satisfy rising demand and instead they are investing many billions in 13th century windmill technology. That’s why gas is ‘too’ cheap (if u can say that) and bankrupting pioneering entrepreneurs & investors…PJS

  22. Iamafan
    Nov 24, 2019 at 12:03 pm

    I have been waiting for the “crash” – a severe price correction – for a long time (long for a man not too young). I have been keeping my powder dry.
    But here is what I am beginning to fear – even if the prices fall 50%, there is so much junk today, that one has to be very selective even after a crash.
    Am I alone?

    • cd
      Nov 24, 2019 at 2:19 pm

      I would think this is a good capitulation spot to buy in…..Its everywhere, I already started buying CHK for nothing. NG has a chance to move higher from here to boot…..70 less wells vs this time last year…Cold winter cycle eats into storage just enough and bammm……

      but I did the same last time everyone was saying this was the end here and made great returns since back last december….

  23. IslandTeal
    Nov 24, 2019 at 12:12 pm

    Cash burn machines are everywhere. Thanks to WolfRichter we have greatly enjoyed the size and depth of the influence. Happy Thanksgiving to you and your families……

  24. Nov 24, 2019 at 12:49 pm

    The corporate (high yield) bond sector has managed to ride out the price swings (and supply issues) in Treasuries. There have actually been record low yielding new issues. Corporates win either way. The Fed missed it, the cut was a big mistake, the drillers will go into recession, prices of the commodity rise, and now they get their rate hike surprise.

  25. Kye Goodwin
    Nov 24, 2019 at 4:17 pm

    Fracking really changed the course of history. I got interested in Peak Oil around 2004, read quite a bit about world supplies, and saw the price rise to over $140/barrel within a few years. I even made some money investing on the foreknowledge. But then fracking started happening in the US and by 2014 after a period of 3 years with oil prices around $90 to $100 the price collapsed. I don’t think that could have happened without the new supply from shale. Without it we would now be in a whole different world.

    So is it really true that fracking never made sense from a profit and loss perspective? I don’t doubt it, but its been so important that it is hard to believe that it would never had happened if investors could have seen the picture clearly from the start. It sure made sense as a way of keeping the energy system from changing. Is fracking somehow a way of “pretending” that we can go on using oil for longer? Will the failure of fracking to make money eventually lead to a huge financial collapse as important in history as the extra decade of the Oil Age that fracking has delivered? I don’t know. I’m not even guessing. The extra oil production is real physical stuff. The financial losses are just money. People wish that money could be like oil, a non-compressible fluid that can flow and accumulate, but it is not. Its more of an idea really, almost as insubstantial as thought. I won’t be surprised if the financial consequences don’t amount to much in the end.

    • Nov 24, 2019 at 5:10 pm

      Good point, we get real oil with phony money, who is the loser here? The story is free energy, always a dream, and the fracking revolution was a derivative on that promise. Suppose MMT takes over and monetizes debt in order to keep the wells flowing? We defeated the Soviet Union with debt, why not the world?

    • xear
      Nov 24, 2019 at 8:08 pm

      If we can just get through these bumps in the road long enough to make nuclear fusion a reality it will all have been worth it.

    • Mars
      Nov 25, 2019 at 12:53 am

      Here in OKC interesting conversations are happening regarding Chesapeake over the past week: blue sky v. sober.

      https://www.investopedia.com/articles/active-trading/051215/cost-shale-oil-versus-conventional-oil.asp

  26. Marcus
    Nov 24, 2019 at 7:56 pm

    It’s ironic that the anti-fracking environmentalists (I’m one) are actually good for these companies. The ease of upscale in production means prices can’t climb. If fracking restrictions were more rigid then prices would go up and the industry would be more sustainable. Circle of life or something like that..

  27. nick kelly
    Nov 24, 2019 at 8:31 pm

    Great bit…about the economics of fracking.

    But equating ALL sources of energy?

    ‘Shale oil and gas drilling is awful for the land, water, and the broader environment. But so are all other methods of supplying power and fuel to an economy…including hydro that destroys rivers and canyons, even wind and solar ( I forget why they are in there)

    True: a dam constricts the flow of a river but creates a lake a far more reliable source of water than a river, and a carefully built dam does have a river below it.

    But there is a downside to everything: roads, houses, and cities destroy fields and forests. All developed economies dam rivers.

    This is an area where the perfect is the enemy of the good. If we equate wind solar and hydro with coal- fired power the conclusion is to keep coal. But if we ask ‘how awful’ and measure them on a scale we don’t.

    Moving on to the economics of shale: what do these numbers say about so called US oil and gas self sufficiency? The waste of money to achieve this via fracking is not sustainable.

  28. Willy Winky
    Nov 25, 2019 at 4:26 am

    Question:

    If there is so much conventional (i.e. cheap to extract and produce) oil remaining.

    Then why are we sucking the dregs out of burned out conventional wells (shale)

    Why are we steaming oil out of TAR sands?

    Why are we drilling miles beneath the ocean?

    And the punchline – these non-conventional oil experiments are all LOSING big money and will never make money because if the price of oil levitates to the point where they make money we quickly find that the economy collapses because economic growth gets CRUSHED when oil prices are too high for an extended period

  29. Leser
    Nov 25, 2019 at 6:28 am

    All of this is mind-boggling: the volume of capital thrown at this, the tiny returns with which investors contend themselves.

    I feel with the driller though and their debt woes, so here’s my free bit of advice: just go to Europe where 2% of total outstanding “high yield” (sic) debt is carrying negative interest. There you can make up on volume what you lose on each barrel!

  30. Augusto
    Nov 25, 2019 at 9:07 am

    With cheap money and a regulatory environment that allows all kinds of BS to be fed to the investing public, you have fracking. The real problem will come when the public has to pay the true cost at the pump, rather than investors who have given their money to the scammers. The Finance industry has everyone and everything so levered up, the least little pressure on the tapped out consumer and the Everything Button goes Pop.

  31. LouisDeLaSmart
    Nov 25, 2019 at 12:47 pm

    \\\
    It’s ironic, that the same industry that prety much dissmantled the government and it’s support structures, today is pushing the blame on the government how they dont have enough support infrastructure. This is by far the most stupid and short sighted industry I have ever seen in my life. Ok, there is some more stupid stuff elsewhere…but for a first world country to obliterate their water resources and to poison the land they are living on for a handfull of dollars is beyond me.
    \\\
    I respect hard work and all people who are earning a living in this industry. This comment is not intended to deminor or reduce their selfesteem and pride they take in their job. I am just saaying that rebuilding railways, ports, bridges and highways would have been a much better investment strategy. And where would the money come from? Well the same place it always comes from…one prints it.
    \\\

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