The Great American Shale-Oil Bust Turns into Massacre, by Wolf Richter

There is carnage in the oil patch. From Wolf Richter at

Shares of shale oil drillers collapsed by 25%-50% today. Their bonds got massacred. Saudi-Russia price-war strategy appears successful in wiping out investors in the US shale-oil sector.

It was so chaotic and brutal in the crude oil market today that the EIA, which is part of the US Department of Energy, emailed out this statement: “We have delayed the release of the Short-Term Energy Outlook to allow time to incorporate recent global oil market events. The outlook will now be released Wednesday, March 11, at 9:00 a.m.”

Shares of Occidental Petroleum, which is heavily involved in US shale oil and gas, collapsed by 53% today to $12.51. They’re down 85% since October 2018, when phase two of the Great American Oil Bust set in, with phase one having commenced in July 2014:

Oxy’s bonds – those that even traded – collapsed today. For example, this $750 million 30-year senior unsecured bond, with a coupon interest of 4.1%, closed on Friday at 92.5 cents on the dollar. Like many bonds, they don’t trade much, but are stuck in bond funds or held by institutional investors, and it’s hard to sell them because there are not many buyers.

Today, there are only two trades listed on FINRA-Morningstar, but they were big trades, with institutional investors unloading them for whatever they could get. So the price today collapsed by 34% from the close on Friday, and by 39% over the past three trading days, to 61 cents on the dollar:

Shares of Chesapeake Energy, a former shale oil-and-gas giant, particularly focused on natural gas, plunged 28% today, from nearly nothing to almost nothing, closing at $0.16. The company has been dilly-dallying around near the bankruptcy-filing counter for years, without having filed yet, as investors continued to feed it fresh cash and agreed to haircuts and restructure its debts. But that fresh-cash option appears to be off the table.

Its bonds, depending how they’re secured, reflect that reality, with many bondholders expecting to get next to nothing in bankruptcy court.

For example, the $1.25 billion senior unsecured 5.5% notes, offered in 2017 as part of Chesapeake’s prior debt restructuring, have done nothing but go downhill. Moody’s rates them Caa3, which is deep junk but not deep enough (my cheat sheet for corporate bond credit ratings by ratings agency). They didn’t trade at all today. On Friday, the last trade was at 16 cents on the dollar. Today, no buyers emerged with a bid that sellers would have accepted:

Shares of Whiting Petroleum – once the shining star in the shale-oil sector that even in mid-2018, according to Wall Street analysts, was still walking on water – collapsed by 40% today to $0.80 a share. They’re down from $150 a share in 2015 and from $50 a share in mid-2018. But in a two-year chart, today’s plunge just disappears into zero:

As is so often the case, even as Whiting’s shares started their long march to zero, its bonds were holding up, until they weren’t. For example, these $749 million of eight-year 6.25% senior unsecured notes, due in April 2023, were trading over 100% of face value until June 2019.

Then they fell. But after the spike at the end of 2019, they were still trading at 91 cents on the dollar. Then they plunged. By Friday, they closed at 36 cents on the dollar. And today, they plunged by over half to 16 cents on the dollar:

What’s the trigger for all this wailing and gnashing of teeth?

Futures for WTI plunged 32% overnight to a low of $27.34, then surged 27% by mid-day to $34.88, then plunged 11% to $30.95 at the moment. Whiplash inducing chaos. The two-year chart shows the collapse of WTI futures over the past two days:

In my article on Sunday night – Good Morning America, All Heck Broke Loose in the Markets Overnight – I sorted through what has led to the collapse of the price of crude oil: The Saudi-Russian price war that is targeting US shale oil investors. And today, investors in the stocks and bonds of US shale oil-and-gas companies got eviscerated.

This is the goal of the price war: Brutalize investors in the sector and send some big shale-oil exploration and production companies, and some big oil field services companies into bankruptcy, where shares would be zeroed out, and bondholders would be subject to special treatments, ranging from high-and-tight haircuts to total wipe out.

And the hope among the two oil-price warriors is that banks will also pull back from lending to the sector, as their energy loan portfolios get bloodied.

The collateral for those loans consists of oil reserves, and the value of those reserves depends on the price of oil, and so the value of that collateral just plunged 30% in one day. And if it costs more to extract the oil than its cash value at the wellhead, the collateral is theoretically worthless.

This elaborate financial system that has been funding these cash-burning operations needs a high price of oil and gas, which is precisely what it hasn’t had in years. And even when WTI was still over $100 a barrel, shale oil producers were still burning cash in this relentlessly tough business.

Now our two price-warriors hope that the damage from the price war – the massacre of existing investors in the US shale oil space – will keep future investors away from the sector so that it will run out of funds to fuel its cash-burning operations, and that enough companies collapse, and that new investors realize that they don’t want to get massacred, and that they therefore refuse to fund cash-burning shale oil operations, and that the US shale oil sector will finally be forced to cut production and take pressure off the oversupplied market, and quit eating away at Saudi and Russian market share.

Having seen how this strategy failed during the 2015-2016 oil bust – when investors only fled for a relatively short time before private equity firms, hedge funds, and others plowed back into it – I nurture doubts that it will be wildly successful this time in slashing US shale oil production over the long term.

But it has already totally crushed investors – even sophisticated shale-oil billionaires – that plowed money back into the market after phase one of the Great American Oil Bust, and a good part of what’s left may be crushed in bankruptcy courts.

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