With U.S. shale peaking & having “never made money,” investors lose billions

C: CC public domain

We know that COVID-19 is rapidly reshaping the oil industry as demand for oil flatlines and the price remains low forcing debt write offs, stranded assets, the cancellation of dividend payments, and lay-offs of once loyal staff.

Even the big companies are not immune.

Ten days ago, I blogged about how BP had slashed up to USD 17.5 billion off the value of its assets after lowering its longer term price assumptions in the wake of COVID-19.

I quoted the Financial Times, saying BP expected the pandemic “to hasten the shift away from fossil fuels.” Those assets are essentially stranded.

This week, Reuters picked up the story under the headline: “BP’s stranded Canadian, Angolan assets expose wider industry risks.”

When BP had made the write down, it failed to mention which specific assets were going to be stranded. But according to Reuters, “company sources said they included three areas, including resources in Canadian oil sands and ultra-deepwater wells off Angola, which involve high costs.”

Reuters added that BP’s announcement exposed “broader risks the industry faces as the world pivots to low-carbon energy.”

And one part of the industry that faces a fraught future are the shale gas companies. For years the warning signs have been there, that the “drill, baby drill, drill it quick, make people sick, forget about the climate” mentality of the shale gas industry was running into serious trouble.

But shale is not like conventional oil. A greater number of wells are needed to keep the oil flowing than conventional wells. More wells means greater costs. And large costs do not stack up when the price of oil is low. And as demand plummets due to climate change and COVID-19, the days of a high oil price are over.

A report published this week by the financial audit company, Deloitte said that oil demand “isn’t expected to return to pre-pandemic levels anytime soon…the COVID-19 pandemic has abruptly fast-forwarded the specter of peak demand to the present.”

And that means bad news for shale.

2020 marks the 15-year anniversary of the U.S. shale boom but now the industry is in trouble. The same report from Deloitte adds that the “reality is that the shale boom peaked without making money for the industry in aggregate. In fact, the US shale industry registered net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital, and saw more than 190 bankruptcies since 2010.”

The report warns of an economic storm on the horizon for shale, with 30% of shale operators already technically insolvent. “In 2020, the double impact of COVID-19 and the oil price supply war seems to have led many investors to shun shale stocks…Significant resource impairments and asset write-offs are expected to hit the industry starting in Q2 2020.”

And what is bad for shale is bad for the rest of the oil and gas industry. “Any major developments in US shales will likely have a domino effect on the global oil and gas industry,” warns Deloitte.

The extreme stress signs are already there. As CNN reports, this year, eighteen oil-and-gas companies have defaulted on their debt, compared to twenty for all of last year. The next company to default could be Chesapeake, a one of the pioneers of the fracking boom and a titan of the shale industry.

However, the “pandemic may tip it over the edge,” reports CNN. Last week, Chesapeake skipped interest payments of USD 13.5 million. Its days could be numbered.

Yesterday, the Motely Fool financial website warned yesterday: “While Chesapeake Energy hasn’t yet filed for bankruptcy, that outcome seems inevitable given its $9 billion in outstanding debt. Because of that, there remains a significant risk that the stock ends up worthless. That’s why investors should avoid it at all costs.”

Even the big companies are not immune.