Tag Archives: Fracking

America’s Oil Boom Is a Fraud, by Bill Bonner

Even at ultra-low interest rates, a lot of fracking in the US wasn’t making any money. From Bill Bonner at bonnerandpartners.com:

PARIS – We promised to end the week with a bang!

You’ll recall that Fed policy always consists of the same three mistakes… 1) Keeping interest rates too low for too long, resulting in too much debt; 2) Raising interest rates to try to gently deflate the debt bubble; and 3) Cutting rates in a panic when stocks fall and the economy goes into recession.

Well, here comes the Big Bang: Mistake #4 – rarely seen, but always regretted.

Mistake #4 is what the feds do when their backs are to the wall… when they’ve run out of Mistakes 1 through 3.

It’s a typical political trade-off. The future is sacrificed for the present. And the welfare of the public is tossed aside to buy money, power, and influence for the elite.

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No Fracking Way: Debt-Laden Shale Producers May Unleash The Next Financial Crisis, by Tyler Durden

Many shale producers are borrowing more than they’re making. From Tyler Durden at zerohedge.com:

After nearly two decades of horizontal drilling, fracking – as it is commonly known, has “turned the energy world upside down,” according to Journalist Bethany McLean, a former Goldman Sachs analyst-turned-journalist.

And according to a new op-ed in the New York Times, McLean has a warning for anyone betting the farm on the shale industry; beware.

In a nutshell, the fracking industry – which “could not have taken off so dramatically were it not for record low interest rates after the 2008 financial crisis,” is setting up for a spectacular fall without rising oil prices and global demand. Fracking companies have largely survived, according to McLean, because “plenty of people on Wall Street are willing to keep feeding them capital and taking their fees.”

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In Biggest Victory For Saudi Arabia, North Dakota’s Largest Oil Producer Suspends All Fracking, by Tyler Durden

From Tyler Durden at zerohedge.com:

Yesterday, during his speech at CERAWeek in Houston, Saudi oil minister Ali al-Naimi made it explicitly clear that Saudi Arabia would not cut production, instead saying that it is high-cost producers that would need to either “lower costs, borrow cash or liquidate” adding that there is “no need for cuts as marginal barrel will get out of the market.” He was right.

Today his wish is slowly coming true after news that North Dakota’s largest producer, Whiting Petroleum, would suspend all fracking, and that Continental Resources has effectively done the same after reporting that it no longer has any fracking crews working in the Bakken shale.

As Reuters reports, Whiting said it would “suspend all fracking and spend 80 percent less this year, the biggest cutback to date by a major U.S. shale company reacting to the plunge in crude prices.”

It was also confirmation that the Saudi plan to put high-cost producers on ice is working, if only temporarily.

After sliding 5.6% to $3.72, Whiting stock jumped 8% to over $4 per share in after-hours trading as investors cheered the decision to preserve capital, even if it means generating far less revenue.

Whiting’s cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows. The cuts will have a big impact in North Dakota, where Whiting is the largest producer.

The Denver-based company said it would stop fracking and completing wells as of April 1. Most of its $500 million budget will be spent to mothball drilling and fracking operations in the first half of the year. After June, Whiting said it plans to spend only $160 million, mostly on maintenance.

Rival producers Hess Corp and Continental Resources Inc have also slashed their budgets for the year, though neither has cut as much as Whiting.

As noted above, during its earnings report, Continental said that in 2016, the Bakken drilling program will continue to focus on high rate-of-return areas in McKenzie and Mountrail counties, targeting wells with an average EUR of 900,000 Boe per well. Based on the higher EUR and a lower targeted completed well cost of $6.7 million per well, the Company expects capital efficiency to increase 17% and finding cost to decrease 15% in 2016.

Given its plans to defer most Bakken completions in 2016, Continental expects to increase its Bakken DUC inventory to approximately 195 gross operated DUCs at year-end 2016. However, Continental also said that while the Company currently has four operated drilling rigs in the North Dakota Bakken and plans to maintain this level through year end, it noted that it currently has no fracking crews deployed in the Bakken, which led some, including Bloomberg to believe, that Continental too has halted Bakken shale fracking.

One thing is certain: the cuts will drag down production and likely reverberate in the economy of North Dakota, the second-largest U.S. oil producing state after Texas, which currently pumps 1.1 million barrels per day. It means that after the 250,000 oil workers already laid off (according to Credit Suisse estimates), tens of thousands of new pink slips to highly paid workers are about to be handed out.

And another thing: as of this moment, Saudi’s oil minister is taking a victory lap in his Lamborghini – after all his plan to push the price of oil so low that marginal oil producers have no choice but to mothball production is starting to bear fruit.

There is just one problem. Whiting Chief Executive Officer Jim Volker said that “we believe this conservative strategy should help us to maintain our liquidity position and leave us well positioned to capitalize on a rebound in oil prices.”

In other words, the moment oil prices rebound even modestly, and according to many the new breakeven shale prices are as low at $40-$50/barrel, the Whitings and Continentals will immediately resume production, forcing Saudi Arabia to go back to square one, boosting supply even higher, and repeat the entire charade from scratch.

And so on.


Shale Shock: Another Leg Lower In Oil Coming After Many Producers Found To Have Far Lower Breakevens, by Tyler Durden

From Tyler Durden at zerohedge.com:

One of the great unknowns facing the US shale industry, and threatening the recurring rumors of its imminent demise, is how it is possible that despite the collapsing number of oil wells, and despite the plunge in crude prices which supposedly are well below all-in shale production costs, does production not only refuse to decline, but in fact has been largely increasing in the past 6 months, with just a modest decline in recent weeks.

The answer may come as a surprise not only to industry pundits, but certainly to Saudi Arabia, whose entire strategy has been to keep pressuring the price of oil low enough for long enough to put as many “marginal producers” in the US shale space out of business as possible.

According to a report by the Bloomberg Intelligence analysts William Foiles and Andrew Cosgrove, Saudi Arabia may have its work cut out for it as it will be far harder to kill many U.S. E&Ps than analysts originally thought.

The reason: a break-even model for the Permian Basin and Eagle Ford shows that oil production across five plays in Texas and New Mexico may remain profitable even when WTI prices fall below $30 a barrel, according to a 55-variable Bloomberg Intelligence model for horizontal oil wells.

The Eagle Ford’s DeWitt County has the lowest break-even, at $22.52, followed by Reeves County wells targeting the Wolfcamp Formation, at $23.40. The diversity of breakevens highlights the hazard posed by looking for a single number, even within a play.

These counties together produced about 551,000 barrels of liquids a day in October. Taking into account drilled but uncompleted wells boosts the number of potential survivors to 19. The wide range of break-evens undermines efforts to come up with a single threshold for U.S. shale producers.

To continue reading: Shale Shock: Another Leg Lower In Oil Coming After Many Producers Found To Have Far Lower Breakevens

It’s Happening: Debt Is Tearing up the Fracking Revolution, by Wolf Richter

The economy is fine, really. Keep buying those stocks. Prosperity is just around the corner. From Wolf Richter at wolfstreet.com:

The shares of Chesapeake Energy, second largest natural-gas driller in the US, crashed nearly 10% today, to $9.29, the lowest price since August 2003, down nearly 70% since oil began to plunge a year ago. The company’s $1.1 billion of 5.75% notes fell to an all-time low of 84.88 cents on the dollar. And its 4.875% notes dropped to 81.25 cents on the dollar, from 86 last week, according to S&P Capital IQ LCD.

All this in the wake of its announcement that it would suspend its dividend for the first time in 14 years. It’s trying to conserve cash, and that dividend costs $240 million a year. It’s dumping assets as fast as it can, including some Oklahoma fields that will save it another $75 million a year in preferred dividends. It’s cutting operating costs and capital expenditures. It’s trying to stay alive.

It has been cash-flow negative in 22 of the past 24 years, according to Bloomberg.

The only thing surprising is that it took so long, that Wall Street kept funding its cash-flow negative operations and dividends for all these years.

Chesapeake used to be mostly a natural gas producer. But the price of natural gas plunged over five years ago and has remained below the cost of production for most wells for much of that time. The only saving grace was that these wells also produced natural-gas liquids and oil, which sold for much higher prices. As its natural-gas business model collapsed, Chesapeake began chasing after oil-rich plays. But a year ago, the price of oil collapsed.

Among natural gas drillers, Chesapeake isn’t in the worst shape. Much smaller Quicksilver Resources filed for Chapter 11 bankruptcy in March. It listed $2.35 billion in debts and $1.21 billion in assets. The difference has been forever drilled into the ground. Stockholders got wiped out. Creditors are fighting over the scraps.

Then there’s natural gas driller Samson Resources. It was acquired by a group of private equity firms, led by KKR, in 2011 for $7.2 billion. Since then, Samson has lost over $3 billion. When Moody’s downgraded Samson to Caa3 in March, it pointed at, among other things, “chronically low natural gas prices” and invoked “a high risk of default.” Samson warned it might have to resort to bankruptcy to restructure its debt.

At the time, a JPMorgan-led group, which holds a $1 billion revolving line of credit, granted Samson a waiver for an expected covenant breach to avert default. But the group reduced the size of the revolver. Last year, the same group had already reduced the credit line from $1.8 billion to $1 billion and had also waived a covenant breach.

“Liquidity death spiral,” is what S&P Capital IQ called this principle by lenders to whittle down the size of the loan as the company runs deeper into trouble, as I wrote at the time. It eventually ends in bankruptcy.

To continue reading: Debt Is Tearing up the Fracking Revolution

SSS Schools Admin on Fracking, by SSS

There is a lot of gloom and doom on the US fracking industry in the blogosphere, some of which SLL has featured. However, a more optimistic view is gaining currency. It may be because the price of oil has improved by $20 per barrel. SLL views that as a dead cat bounce and ultimately oil will take out its recent lows, but here’s SSS at theburningplatform.com with the more upbeat take on oil pricing and fracking:

Good news for frackers.

In mid-May 2015, domestic oil production increased by 300,000 bbl/day over the past 3 months to a grand total of 9.6 million bbl/day. This total domestic production is the highest it’s been since 1970, when domestic oil production started a long, 35 year slide to just under 5 million bbl/day in 2005.

In the 10 years since, the U.S. has added over 4.6 million bbl/day to its production, and fracking has accounted for 90% of that increase. For the math challenged, that’s 4.14 million bbl/day.

So why is domestic oil production increasing when so many predicted a death knell for the fracking industry as the global PRICE of oil plummeted from $110 a barrel to its current level of $60. It’s because the fracking companies still standing can profit from $60 a barrel and not the “conventional wisdom” that they need the global price of oil to remain at or above $80-85 a barrel. Several factors are in play.

—-Half of the NEW fracking wells started in September 2014 have been idled. Lower cost to the companies in energy consumed, equipment purchased or leased, and jobs required.

—-100,000 workers laid off. Huge savings to the companies in labor costs.

—-Less productive wells idled. Production at the best wells ramped up. Yes, this will deplete these wells even faster, but the companies have already identified promising replacements through …….

—-Skyrocketing technology in horizontal drilling, which can now burrow its way through the earth up to 15,000 feet using seismic imaging and a host of other breakthroughs to find what they’re looking for: huge amounts of recoverable oil. And the technology is working very, very well.

—-Bankruptcies. Sorry about the jobs lost or idled, but that’s how destructive capitalism works. The companies left standing are snapping up oil leases and idled equipment at fire sale prices, and …..

—-Institutional investors are watching closely. And they like what they see and have poured over $20 billion into the fracking companies in the past few months. This is precisely the OPPOSITE of what occurred in 1986 when the domestic oil industry collapsed and the banks and investors stampeded to the exits.

—-Finally, a coup de grace has been delivered to the radical environmental groups who have been fighting fracking for years based on spurious allegations that fracking threatens under ground water sources. Two days ago, the EPA released a multi-year study costing nearly $50 million dollars that it does not. The EPA study did not reveal ONE SINGLE INSTANCE of fracking fluids which compromised under ground water. Not one.

Fracking for oil is safe and critical to the economy and national security. Critical. I challenge the anti-frackers who have read these comments to present any case which refutes my analysis and firm support of the fracking industry. It will survive, and it will prosper. Greatly to the nation’s and individual’s benefit.

And I invite Admin to go first.


The US Oil Bust Just Got Worse, by Wolf Richter

From Wolf Richter, at wolfstreet.com:

The price of Oil did today what it has been doing for a while: it waits for a trigger and plunges. As I’m writing this, West Texas Intermediate is down 4.4%, trading at $44.99 a barrel, less than a measly buck away from this oil bust’s January low. It’s down over 20% from the peak of the most recent sucker rally.

US oil drillers have been responding by slashing capital expenditures, including drilling, in a deceptively brutal manner. In the latest week, drillers idled 56 rigs that were classified as drilling for oil, according to Baker Hughes. Only 866 rigs were still active, down 46.2% from October, when they’d peaked at 1,609. In the 22 weeks since, drillers have taken out 743 rigs, the most dizzying cliff dive in the data series, and probably in history:

You’d think this sort of plunge in drilling activity would curtail production. Eventually it might. But for now, the industry has focused on efficiencies, improved drilling technologies, and the most productive plays. Drillers are trying to raise production but with less money so that they can meet their debt payments. Thousands of wells have been drilled recently but haven’t been completed and aren’t yet producing. This is the “fracklog,” a phenomenon that has been dogging natural gas for years.


To continue reading: The US Oil Bust Just Got Worse

The Sudden Collapse of Fracking, by Wolf Richter

From Wolf Richter, wolfstreet.com:

Never before has drilling for oil plunged this far this fast.

The word “boom” can never be thought of as a stand-alone concept that everyone loves, particularly governments because they get to rake in the big bucks. It’s always attached to its miserable twin that no one wants to see, the “bust.” They come invariably in cycles, one after the other. You can’t have one without the other. It’s just a question of time. And in the world of fracking, it’s no different.

The fracking-for-oil boom started in 2005, collapsed by 60% during the Financial Crisis when money ran out, but got going in earnest after the Fed had begun spreading its newly created money around the land. From the trough in May 2009 to its peak in October 2014, rigs drilling for oil soared from 180 to 1,609: multiplied by a factor of 9 in five years! And oil production soared, to reach 9.2 million barrels a day in January.

That’s what real booms look like. They’re fed by limitless low-cost money – exuberant investors that buy the riskiest IPOs, junk bonds, leveraged loans, and CLOs usually indirectly without knowing it via their bond funds, stock funds, leveraged-loan funds, by being part of a public pension system that invests in private equity firms that invest in the boom…. You get the idea.

That’s how much of the American shale-oil revolution was funded.

Production soared for five years and eventually outpaced sluggish demand. Crap happened on the world scene, and suddenly the fracking boom, the biggest no-brainer in the history of mankind, turned into a terrible bust.

On the drilling side, the bust began in mid-October last year, after the price had been plunging for over three months. At that time, 1,609 rigs were actively drilling for oil, according to Baker Hughes. Since then, week after week, drillers were idling rigs as fast as they could.

In the latest reporting week, drillers idled another 84 rigs, the second biggest weekly cut ever, after idling 94 rigs two weeks earlier. Only 1056 rigs are still drilling for oil, down 443 for the seven reporting weeks so far this year and down 553 – or 34%! – from the peak in October.


To continue reading: The Sudden Collapse of Fracking