US Shale Companies Facing “Catastrophic Failure” over Ballooning Debt

C: Mark Dixon

As the fledgling UK fracking industry bleeds investors’ money in alarming quantities on a daily basis, plagued by ongoing issues of democratic accountability, seismic activity, financial viability and on-going legal challenges, it will find no comfort from looking across the pond.

The US shale industry, even though it is in the middle of a so-called production boom, is in many ways no different: it too is bleeding money with many companies facing ballooning debt and declining well success rates.

As a recent report from the Institute for Energy Economics and Financial Analysis (IEEFA) noted: “Even after two and a half years of oil price increases, US. fracking – focused oil and gas companies continued their eight – year losing streak in the first half of 2018. These small and mid-sized US exploration and production companies (E&Ps) reported $3.9 billion in negative cash flows through June.”

The IEEFA added that: “These disappointing results come on the heels of a decade of bleak financial performance as the fracking sector has failed consistently to produce enough cash to satisfy its thirst for capital. Time and again, as frackers have returned to capital markets for new infusions of cash, these companies have racked up enormous long-term debts.”

It is therefore, of no surprise to IEEFA that “The ranks of frustrated investors are growing”.

They are not the only ones warning about the ongoing problems of US shale: A 40-year oil industry veteran, Mike Shellman, wrote a piece last month entitled “Deep The Denial” where he provided some sobering statistics on the shale industry:

He wrote: “I recently put somebody very smart on the necessary research (SEC K’s, press releases regarding private equity to private producers, etc.) to determine what total upstream shale oil debt actually is. We found it to be between $285-$300B, both public and private.”

He then quoted Kallanish Energy Consultants, which also put out an article last month stating: “The quality of debt issued by the North American oil and gas industry has changed substantially – and not in a good way — over the past two years”.

Kallanish, in turn quoted Paresh Chari, a Moody’s vice president-senior analyst, who said that “The North American oil and gas industry today faces about $240 billion of debt maturities through 2023, with the amount increasing fairly steadily apart from a modest spike in 2022.”

It is worth remembering that this is maturing debt, not total debt which will be higher.

In other words, argues Shellman, just under thirty per cent of shale production in America is used just “to pay debt interest.” He argues that using the industry’s own breakeven prices, the US shale oil industry will ultimately have to produce 9 billion barrels of oil, “as much as it has already produced in 10 years…just to pay its total long term debt back. “

“Essentially”, says Shellman, “the only chance it has of doing that is if oil prices  go to $115-125 a barrel, and stays there for a very long time … Most of this shale oil debt, in my opinion, is going to be virtually impossible to ever pay back.”

It will also never be paid back because the oil price will fall as demand for oil falls as renewables become cheaper and the electric vehicle revolution takes hold. It will also never be paid back due to the need to act on cliamte change, which will also reduce the demand for oil.

Even the normally loyal Oilprice.com website is waving large red flags too. “The shale oil companies say that technology will solve the problem. But so far, the evidence suggests that the decline curves are getting steeper. Production from new wells is falling faster than before, an indication that companies are already moving away from the best prospects to more marginal deposits.”

It is no surprise that other commentators are noticing the shale industry’s growing problems: One says: “While the U.S. Shale Industry produces a record amount of oil, it continues to be plagued by massive oil decline rates and debt …  When we add up all the negative factors weighing down the shale oil industry, it should be no surprise that a catastrophic failure lies dead ahead.”