The shale patch will not be making much of a contribution to economic expansion over the course of the next few years. From Nick Cunningham at oilprice.com:
A few high-profile shale executives say the glory days of shale drilling are over.
In a round of earnings calls, the financial results were mixed. A few companies beat earnings estimates, while others fell dramatically short.
The chief executive of Pioneer Natural Resources, Scott Sheffield, said that the Permian basin is “going to slow down significantly over the next several years,” and he noted on the company’s latest earnings call that the company is also acting with more restraint because of pressure from shareholders not to pursue unprofitable growth. “I’ve lowered my targets and my annual targets, a lot of it has to do with…to start with the free cash flow model that public independents are adopting,” Sheffield said.
More and amplified weirdness is coming. From James Howard Kunstler at kunstler.com:
The Golden Golem of Greatness shifted into mad bull overdrive for last night’s Minneapolis fan rally, cussing and bellowing at the picadors of the Left who have been sticking lances in his neck for three years. Decorum is not Mr. Trump’s strong suit, but then the bull is not sent into the ring to negotiate politely for his life. The narrative of the bullring is certain death. The bull must do what he can within his nature to dispute it.
It’s in Mr. Trump’s nature to act the part of a reality TV star, and, of course, it is the nature of reality TV shows to be unreal. That is perhaps the ruling paradox of life in the USA these days. Saturated in unreality, the spectators (also called “voters”) flounder through a relentless barrage of narratives aimed at confounding them, with the unreal expectation that they can make sense of unreal things. In a place like Minneapolis of an October evening, you can go see the Joker movie or take in the President’s rally — and come away with the same sense of hyper-unreality. We’re no longer the nation we pretend to be and we don’t know it. Jokers are wild and the joke’s on us.
Just like Silicon Valley investors are backing away from unprofitable unicorns, shale patch investors are backing away from unprofitable shale drillers. From Nick Cunningham at oilprice.com:
The growth in U.S. shale production is grinding to a halt as low prices put drillers in a financial vice.
The slowdown has been unfolding for much of 2019, but the latest slide in oil prices is another blow to cash-strapped companies. Share prices for many E&Ps are down sharply. For instance, Devon Energy’s stock is down 20 percent since mid-September; EOG Resources is off by 17 percent and Pioneer Natural Resources is down by more than 13 percent. Many other companies have seen similar declines.
If shale oil production collapses, does that mean the US has to suck up to Saudi Arabia even more than it already does? From Nick Cunningham at oilprice.com:
The financial stress sweeping over the U.S. shale sector has led to a sharp contraction in activity.
Oil and gas activity in Texas and parts of New Mexico declined in the third quarter, with the Dallas Fed’s business activity index reporting a reading of -7.4, down from -0.6 in the second quarter. A negative reading signals contraction while a positive reading indicates expansion. Falling deeper into negative territory indicates that shale drillers in the Permian further cut drilling activity over the last three months.
Shale oil is a great thing, if you can make money extracting it. From Tyler Durden at zerohedge.com:
The collapse in the shale industry is continuing with no signs of stopping or even slowing down.
No sooner did we highlight how shale is doomed no matter what the industry does and how recent price movements have triggered chaos across the industry, than we find out that oil producers and their suppliers are now cutting budgets, staffs and production goals, according to Reuters.
The U.S. now has 904 working rigs, which is down 14% from a year ago. Harold Hamm, chief executive of shale producer Continental Resources, still thinks this could be too many.
Additionally, bankruptcy filings by U.S. energy producers through mid-August of this year have matched the total for all of 2018 already. Earl Reynolds, CEO of Chaparral Energy said:
“You’re going to see activity drop across the industry.”
His firm has slashed its workforce by about 25% and cut spending by about 5%. It has also agreed to sell its headquarters and use some of the proceeds to pay off debt.
Cowen & Co. estimated last month that oil and gas producers deployed 56% of their total budgets through June and the firm expects total spending to fall 11% over last year.
And one slowdown begets another: as drilling slows, oilfield services companies are also making staff and budget cuts. Some, like Schlumberger and Halliburton Co., are considering restructurings. For example, Schlumberger is planning a writedown this quarter and has said that its North American results have been “under significant pressure”.
Extended supply lines and the global economy’s dependence on fossil fuels creates an unstable situation prone to dramatic dislocations. From James Howard Kunstler at kunstler.com:
What’s at stake in all these international confabs like the G-7 are the tenuous supply lines that keep the global game going. The critical ones deliver oil around the world. China imports about 10 million barrels a day to keep its operations going. It produces less than 4 million barrels a day. Only about 15 percent of its imports come from next door in Russia. The rest comes from the Middle East, Africa, and South America. Think: long lines of tanker ships traveling vast distances across the seas, navigating through narrow straits. The Chinese formula is simple: oil in, exports out. It has worked nicely for them in recent decades. Things go on until they don’t.
That game is lubricated by a fabulous stream of debt generated by Chinese banks that ultimately answer to the Communist Party. The party is the Chinese buffer between banking and reality. If the party doesn’t like the distress signals that the banks give off, it just pretends the signals are not coming through, while it does the hokey-pokey with its digital accounting, and things appear sound a while longer.
The US produces just over 12 million barrels of oil a day. About 6.5 million of our production is shale oil. We use nearly 20 million a day. (We’re not “energy independent.”) The shale oil industry is wobbling under the onerous debt load that it has racked up since 2005. About 90 percent of the companies involved in shale oil lose money. The capital costs for drilling, hauling a gazillion truckloads of water and fracking sand to the rig pads, and sucking the oil out, exceed the profit from doing all that. It’s simply all we can do to keep the game going in our corner of the planet, but it’s not a good business model. After you’ve proved conclusively that you can’t make a buck at this using borrowed money, the lenders will quit lending you more money. That’s about where we are now.
Posted in Business, Collapse, Debt, Economy, Energy, Financial markets, Governments
Tagged Fracking, Oil, Renewable energy, Shale Oil, Supply lines
Much of the shale oil produced in this country is done so at a loss. That can’t last forever. From Nick Cunningham at oilprice.com:
A top U.S. shale executive said that it may only be the Midland basin in the Permian that can grow production beyond 2025.
Aside from Midland, every other shale basin may be on borrowed time, with the best acreage already picked over and oil prices languishing below $60 per barrel.
It’s been a brutal two weeks for the U.S. shale industry, clobbered by a series of poor financial results from several drillers at a time when oil prices more broadly are in freefall. The latest was Oasis Petroleum, which plunged by more than 30 percent on Wednesday, after the company said it would probably spend a little bit more than previously expected, and might produce a little bit less.
Last week, Concho Resources admitted that one of its more promising experiments, a 23-well project, suffered from poor results because the wells were packed too closely together. The company’s share price plunged by more than 22 percent because investors realized that perhaps Concho Resources, and other shale drillers like it, may not be able to produce as much oil as expected from a given level of spending.
But the hits keep on coming. President Trump announced a new round of tariffs, scheduled to take effect in September. China responded by digging in, and letting its currency depreciate, which set off a global panic about currency wars and a slowing economy. Oil entered a bear market, down more than 20 percent from a recent peak in April. U.S. energy stocks across the board fell to new depths.
Prices recovered on Thursday on rumors about more OPEC+ cuts, but that has done little to dispel concerns about U.S. shale.