Tag Archives: Shale Oil

The Uncomfortable Hiatus, by James Howard Kunstler

Posted on September 3, 2018 | Leave a comment

Things that cannot continue must change. From James Howard Kunstler at kunstler.com:

And so the sun seems to stand still this last day before the resumption of business-as-usual, and whatever remains of labor in this sclerotic republic takes its ease in the ominous late summer heat, and the people across this land marinate in anxious uncertainty. What can be done?

Some kind of epic national restructuring is in the works. It will either happen consciously and deliberately or it will be forced on us by circumstance. One side wants to magically reenact the 1950s; the other wants a Gnostic transhuman utopia. Neither of these is a plausible outcome. Most of the arguments ranging around them are what Jordan Peterson calls “pseudo issues.” Let’s try to take stock of what the real issues might be.

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Why The Shale Oil “Miracle” Is Becoming A “Debacle”, by Chris Martensen

Posted on August 27, 2017 | Leave a comment

Shale oil drillers are supposedly making money, and some of them claim they could still make money at even lower oil prices, but more money relentlessly flows out of the drillers than comes in, which is most people definition of losing money. From Chris Martensen at peakprosperity.com:

Dispelling the magical thinking behind the hype

Energy is everything. 

This is an amazingly important concept. Yet it’s almost universally overlooked.

Sometimes it’s hard to appreciate the magical role energy plays in our daily lives because most of what we experience is a derivative of it. The connection is hidden from direct view.  Because of this, most people utterly fail to detect or appreciate the priceless and irreplaceable role of high net-energy fuel sources (such as oil and gas) to our modern lifestyle.

With high net-energy, society enjoys increasing complexity and technological advances. It’s what enables us to pursue massive goals like desalinating billions of gallons of seawater, or going to Mars.  But without high net-energy fuel sources, our capabilities quickly regress to those of decades — or even centuries — past.

Which is why understanding where we truly are in the ‘net-energy story’ is so incredibly important. Is the US on the cusp of being “energy independent” from here on out? Is the “shale miracle” ushering in a glorious new ‘boom’ era that will vault America to unprecedented prosperity?

No. The central point of this report is that the US is deluding itself when it comes to energy abundance (generally) and oil (specifically).

Yet that’s not what we hear from the cheerleaders in the industry or in our media. From them, we hear a silver-tongued narrative of coming riches — a narrative that contains some truth, some myth, and a lot of fantasy.

It’s those last two parts — the myths and fantasies — that are going to seriously hurt many investors, as well cause a lot of extremely poor policy and investment decisions.

The bottom line is this: The US shale industry resembles a fraudulent Ponzi scheme much more so than it does any kind of “miracle”.

How do I know that?  Because, collectively, US shale companies have lost cash in every year of their existence.  The burned through cash when oil was $100 — and again when it was $90, $80, $70, $60, $50, $40, and $30 a barrel.  They burned through cash in 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016.

To continue reading: Why The Shale Oil “Miracle” Is Becoming A “Debacle”

 

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After Messy Price War, OPEC Gets the Blues, Can’t Figure Out How “to Live Together” with US Shale Oil, by Wolf Richter

Posted on February 23, 2016 | Leave a comment

From Wolf Richter at wolfstreet.com:

El-Badri’s nightmare.

OPEC Secretary General Abdalla Salem El-Badri admitted on Monday that the price war has backfired.

While it still controls about 40% of global oil production, OPEC has been losing market share to US and Canadian producers. So to escape the dreary fate of becoming an irrelevant cartel, it unleashed a price war at its Thanksgiving 2014 meeting by refusing to cut production. And oil fell off the chart.

The casualties are piling up everywhere. Countries like Venezuela and Nigeria are teetering. Russia and Brazil have plunged into deep recessions. Petro-currencies have swooned. State-controlled oil companies like Pemex or Petrobras are hoping for a bailout. The sovereign wealth funds of Norway, Saudi Arabia, and other oil-producing nations have had to dump stocks and bonds to fill budget holes. Dozens of smaller US shale-oil and offshore drillers either have already defaulted or filed for bankruptcy. Investors have lost their shirts. Even the “smart money” got cleaned out.

The price of WTI hit $26.19 a barrel on February 11, the lowest since May 2003. And OPEC was not amused. So Secretary General Abdalla Salem El-Badri blamed US shale oil drillers for mucking up OPEC’s elegant price-war strategy.

“Shale oil in the United States, I don’t know how we are going to live together,” he told energy executives at the annual IHS CERAWeek in Houston on Monday, according to Bloomberg:

OPEC has never had to deal with an oil supply source that can respond as rapidly to price changes as U.S. shale, El-Badri said. That complicates the cartel’s ability to prop up prices by reducing output.

“Any increase in price, shale will come immediately and cover any reduction,” he said.

In a rare admission that the policy hasn’t worked out as planned, El-Badri said that OPEC didn’t expect oil prices to drop this much when it decided to keep pumping near flat-out.

So last week, cracks emerged in OPEC’s elegant price-war strategy when a group of countries, including Saudi Arabia and Russia, agreed in principle to freeze oil production, hilariously, at current balls-to-the-wall levels, provided that other oil-rich countries, particularly Iran, which is just now starting to ramp up production, join in as well. But, as we pointed out, “political baloney doesn’t fix the fundamental issue” [read The Saudi/Russia Oil Deal “Just a Bunch of Bull”].

“This is the first step to see what we can achieve,” is what El-Badri said about this oil deal. “If this is successful, we will take other steps in the future.”

He refused to specify what these “other steps” might be, and alternatively what OPEC might do if this deal is not “successful.”

To continue reading: After Messy Price War, OPEC Gets the Blues, Can’t Figure Out How “to Live Together” with US Shale Oil

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Shale’s Running Out of Survival Tricks as OPEC Ramps Up Pressure, by Dan Murtaugh

Posted on December 29, 2015 | Leave a comment

No, things are not getting better, and they’re going to get a whole lot worse. From Dan Murtaugh at bloomberg.com:

U.S. oil production set to fall by record in 2016, EIA says

‘Limited scope’ for further output cost reductions: SocGen

In 2015, the fracking outfits that dot America’s oil-rich plains threw everything they had at $50-a-barrel crude. To cope with the 50 percent price plunge, they laid off thousands of roughnecks, focused their rigs on the biggest gushers only and used cutting-edge technology to squeeze all the oil they could out of every well.

Those efforts, to the surprise of many observers, largely succeeded. As of this month, U.S. oil output remained within 4 percent of a 43-year high.

The problem? Oil’s no longer at $50. It now trades near $35.

For an industry that already was pushing its cost-cutting efforts to the limits, the new declines are a devastating blow. These drillers are “not set up to survive oil in the $30s,” said R.T. Dukes, a senior upstream analyst for Wood Mackenzie Ltd. in Houston.

The Energy Information Administration now predicts that companies operating in U.S. shale formations will cut production by a record 570,000 barrels a day in 2016. That’s precisely the kind of capitulation that OPEC is seeking as it floods the world with oil, depressing prices and pressuring the world’s high-cost producers. It’s a high-risk strategy, one whose success will ultimately hinge on whether shale drillers drop out before the financial pain within OPEC nations themselves becomes too great.

Drillers including Samson Resources Corp. and Magnum Hunter Resources Corp. have already filed for bankruptcy. About $99 billion in face value of high-yield energy bonds are trading at distressed prices, according to Bloomberg Intelligence analyst Spencer Cutter. The BofA Merrill Lynch U.S. High Yield Energy Index has given up almost all of its outperformance since 2001, with the yield reaching its highest level relative to the broader market in at least 10 years.

“You are going to see a pickup in bankruptcy filings, a pickup in distressed asset sales and a pickup in distressed debt exchanges,” said Jeff Jones, managing director at Blackhill Partners, a Dallas-based investment banking firm. “And $35 oil will clearly accelerate the distress.”

To continue reading : Shale’s Running Out of Survival Tricks

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Shale Drillers Turn to Asset Sales as Early Swagger Wanes, by Bradley Olson

Posted on September 11, 2015 | 1 comment

The only surprise would be is if anyone is surprised. From Bradley Olson at bloomberg.com:

Prized assets are going on the market after 50% oil decline

One in eight junk-rated energy firms risking default: Moody’s

A renewed plunge in oil prices and the winding down of other financial lifelines is forcing shale drillers to auction off once-prized assets and settle for less in potential deals.

This week, companies such as Chesapeake Energy Corp. said they are embracing the strategy as they confront the reality of a prolonged, painful crash. While executives have assured investors that it won’t be a fire sale, recent deals suggest that prices have fallen significantly from even a few months ago, according to data compiled by Bloomberg.

With one-sixth of major independent oil and gas producers facing debt payments that are more than 20 percent of their revenue, austerity has replaced the swagger that characterized the earliest days of the oil bust. Contracts that locked in higher prices are expiring, leading banks to reduce credit lines in coming months. Drillers caught in the squeeze may be forced to auction off some of their best holdings to raise cash or accept more expensive financing to avoid bankruptcy, according to more than a dozen bankers, lawyers and company officials who specialize in energy deals.

To continue reading: Shale Drillers Turn to Asset Sales

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Is The US Shale Industry About To Run Out Of Lifelines? by Tyler Durden

Posted on July 21, 2015 | Leave a comment

Zero Hedge confirms what SLL said back in December in “Oil Ushers in the Depression.” There’s always an oddball or two, but the funny thing about most creditors is that they want to get their money back. Thus, the shale industry is indeed about to run out of lifelines. From Tyler Durden at zerohedge.com:

Earlier today, Chesapeake Energy – in a mad scramble to conserve cash – eliminated its common dividend, a move which i) will save the company around $240 million per year, but ii) caused the stock to plunge to a twelve-year low.

The company said that a “reduction in capital” stemming from the “current commodity price environment” had left it unable to invest as much as it would like in its “world class assets.” Chesapeake also said its “liquidity position remains extremely strong with more than $2 billion of unrestricted cash on [the] balance sheet and an undrawn $4 billion revolving credit facility.”

As we noted this morning, it remains to be seen how that liquidity position will hold up in the face of persistently depressed prices. Of course one thing that’s perpetuating the “current commodity price environment”, is easy access to capital markets. We’ve discussed the dynamic on too many occasions to count, but because it is in fact one of the most important narratives around when it comes to understanding both the current state of the global economy and why illiquid corporate credit markets are so dangerous, we’ll recount it briefly:

Access to cheap cash via capital markets allows otherwise insolvent producers to keep drilling even as prices collapse, creating what are effectively zombie companies on the way to delaying the Schumpeterian endgame and embedding an enormous amount of risk in HY credit by flooding the market with supply just as demand from investors (who are delirious from hunger after being starved of yield by the Fed) peaks and secondary market liquidity continues to dry up. This dynamic has served to create a supply glut in a number of industries and has suppressed commodity prices in a self-feeding deflationary loop.

Unfortunately for retail investors, the read-through is obscured by accounting procedures.

As we’ve outlined previously, thanks to SEC rules on how drillers are required to value their reserves, producers are effectively forced to overstate the value of their O&G businesses by nearly two-thirds, which can lead unsophisticated investors who don’t bother to read the 10K fine print to believe that the businesses are healthier than they actually are.

Meanwhile, as we quipped earlier this month, drillers are about to be “zero hedged” as the price protection which accounted for 15% of Q1 revenue for around half of North American E&P companies (and which also helped keep bank credit lines open), rolls off.

Because the next round of revolver raids for the industry isn’t due until October, investors may have been lulled to sleep by exactly the kind of credit facilities Chesapeake cites as contributing to its “extremely strong” liquidity position. In short, banks are about to run out of patience with this industry.

To continue reading: Is Shale Out Of Lifelines?

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