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Are More Bankruptcies On The Way For US Oil?


Something that’s been whispered about in the last few months is now being talked about loudly: U.S. oil drillers’ debts. There have been a few notable warnings that shale boomers might want to slow down their production boost lest they bring on another price crash, but the truth seems to be that they can’t do it: they have debts to service.

Now that international oil prices are once again on a downward spiral, drillers are facing a new challenge, according to Bloomberg: their bondholders are no longer optimistic.

Shareholders were the first to start doubting the recovery as it became increasingly evident that OPEC’s production cut agreement is failing to have the effect that everyone—or almost everyone—expected. Energy stocks have generally been on a slide since the start of the year.

Now creditors are joining shareholders. In June, Bloomberg data shows, junk bonds in the energy industry lost 2 percent. To compare, last year energy junk bonds were up 38 percent despite 89 bankruptcies in the sector. The S&P 500 Energy Sector Index has shed 16 percent since the start of the year. According to one Bloomberg Intelligence analyst, energy sector bonds are beginning to trade like stocks, and that’s not good news for the companies issuing them. Bonds are as a rule are much more stable than stocks, and bondholders are a calmer breed than shareholders because the latter get hurt if profits shrink or the company files for bankruptcy. That the former are getting jittery is a signal that there may be more bad news on the horizon.

Perhaps the worst such news would be OPEC and its partners deciding to change their price-influencing strategy and follow the advice of Commerzbank’s head of commodities research, Eugen Weinberg: turn the taps back on. That would be a bold move, and whether OPEC would make it is very far from certain. Yet it seems to be the only one that would work against shale.

The elephant in the shale room is that despite remarkable advancements in cost-cutting, shale drillers have needed to borrow heavily in the last few years—first to grow, and then to survive the downturn. Last year, Moody’s warned that oil and gas drillers and service providers face a debt load of US$110 billion maturing by 2021. Next year alone, the industry would have to repay US$21 billion. By 2021 this will grow to US$29 billion. What’s more, Moody’s said, 65 percent of that debt is speculative-grade, or junk.

Shale drillers have entered a vicious circle, succinctly described by oil analyst Michael Fitzsimmons. They boost production because they need to make money to repay their debts. This production growth fuels the global glut and pressures prices, so the drillers actually make less money than they would otherwise. Debt-servicing expenses rise, so drillers need to continue pumping more to make up for lower profit margins.

t’s an interesting situation in world oil: U.S. drillers are in all likelihood acutely aware that they would fare better if they slowed down their production growth, as prices will certainly rebound as they do every time Baker Hughes reports a decline in the weekly rig count. Yet, it seems they can’t afford to slow down with all this debt looming on their horizon.

The global competitors, OPEC, Russia, and their smaller partners must also be aware that they can do more harm to U.S. shale if they start pumping at maximum capacity. Only they probably can’t afford this, either, not with their budget gaps that were widened by the first stage of the war on shale when OPEC employed the same tactic. What happens next will be interesting to watch—be it increased prices or a train wreck.

9 Comments on "Are More Bankruptcies On The Way For US Oil?"

  1. rockman on Tue, 18th Jul 2017 2:38 pm 

    Something that’s been whispered about in the last few months is now being talked about loudly: U.S. oil drillers’ debts.”

    “Whispered”??? This guy must be hard of hearing. LOL. And “What’s more, Moody’s said, 65 percent of that debt is speculative-grade, or junk.” IOW these are unsecured creditors who typically have their debt cancelled by Chapter 11 filings…of which there have been 240+ so far. An estimated $95 BILLION in debt has been eliminated by C11 filings to date.

    For all the details just read thru Good News About Oil Company Bankruptcies

  2. bobinget on Tue, 18th Jul 2017 2:50 pm 

    120 to 130 degrees forecast in Kuwait and ME next 50 days.
    I guess oil workers will need to only venture out at night.

    Oh, first half of 2017, second hottest recorded.

    summer starts June 20, ends Sept22.

  3. Apneaman on Tue, 18th Jul 2017 4:48 pm 

    There would be plenty more if they had to pick up the tab for their mess. Cancer bankruptcies.

    Treated hydraulic fracturing wastewater may pollute area water sources for years

    Fracking pollution stays in waterways long after the fracking is done

    If you’re a Cancer and you know it clap your hands….CLAP! CLAP!

  4. Go Speed Racer on Tue, 18th Jul 2017 7:25 pm 

    Well Bob in get, I guess those oil drillers will have
    to start living underground. To get out of the hot sun.

    Maybe each guy could have a water tank on his back,
    and an electric fountain on top of his head.

  5. Bloomer on Tue, 18th Jul 2017 11:09 pm 

    US Shale Oil is right up there with the .com and housing bubbles. The Saudis keep giving head fakes that they will curtail oil production. Giving false hope to the oil shade drillers and their financial backers. Containment not likely when the bubble finally does burst, the Fed will once again be called upon for bail out money and QE.

  6. rockman on Wed, 19th Jul 2017 8:18 am 

    Actually they may be correct but for reasons they are not aware of. This will take absorbing the long link below. … tcies.html

    Too much to summarize but here’s a pertinent portion of the report titled: “Rising oil prices may mean more bankruptcies”

    “Private equity investors and other sophisticated parties (such as institutional bondholders) understand that rising commodity prices are an opportunity and that Chapter 11 bankruptcy may provide the means to take control of the debtor and to maximize the future upside value that will be realized if prices continue to rise.”

    As an example recall the story of Halcon. After the Chapter 11 agreement with the creditors 96% of the stock was transfered to those creditors. This eliminated more then $1 BILLION in debt and produced an $600 million asset based credit line. The new owners/creditors then sold Bakken assets for $1.4 BILLION which produced an 18% increase in stock value. The 96% of the stock now owned by the former creditors.

    And what is Halcon up to these days? Getting heavy into the Permian Basin which has become red hot in the last year. Subject to how that effort turns out and oil/NG prices in a few years the value of that 96% of the stock might be several times larger then the debt it was traded for.

    That’s what the report explains: a developing incentive for creditors to push damaged companies into Chapter 11 “debtor-in-possession” reorganizations. And the great advantage the former creditors have available:

    “Debtor-in-possession financing or DIP financing is a special form of financing provided for companies in financial distress, typically during restructuring under corporate bankruptcy law, such as Chapter 11 bankruptcy. Usually, this debt is considered senior to all other debt, equity, and any other securities issued by a company — violating any absolute priority rule by placing the new financing ahead of a company’s existing debts for payment.

    It may be used to keep a business operating until it can be sold as a going concern, if this is likely to provide a greater return to creditors than the firm’s closure and a liquidation of assets. It may also give a troubled company a new start, albeit under strict conditions. In this case, “debtor in possession” financing refers to debt incurred while in bankruptcy, and “exit financing” is debt incurred upon emerging from reorganisation under bankruptcy law.”

    Which explains how Halcon, a busted company, probably got a brand new shiny $600 MILLION credit line.

  7. bobinget on Wed, 19th Jul 2017 9:52 am 

    Not so fast for ‘conventional’ crude producers.

    Summary of Weekly Petroleum Data for the Week Ending July 14, 2017

    U.S. crude oil refinery inputs averaged over 17.1 million barrels per day during the week
    ending July 14, 2017, 125,000 barrels per day less than the previous week’s average.
    Refineries operated at 94.0% of their operable capacity last week. Gasoline production
    decreased last week, averaging 10.1 million barrels per day. Distillate fuel production
    decreased last week, averaging over 4.9 million barrels per day.

    U.S. crude oil imports averaged 8.0 million barrels per day last week, up by 386,000
    barrels per day from the previous week. Over the last four weeks, crude oil imports
    averaged over 7.8 million barrels per day, 1.7% below the same four-week period last
    year. Total motor gasoline imports (including both finished gasoline and gasoline
    blending components) last week averaged 591,000 barrels per day. Distillate fuel imports
    averaged 126,000 barrels per day last week.

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum
    Reserve) decreased by 4.7 million barrels from the previous week. At 490.6 million
    barrels, U.S. crude oil inventories are in the upper half of the average range for this time
    of year. Total motor gasoline inventories decreased by 4.4 million barrels last week, but
    are in the upper half of the average range. Both finished gasoline inventories and
    blending components inventories decreased last week. Distillate fuel inventories
    decreased by 2.1 million barrels last week but are near the upper limit of the average
    range for this time of year. Propane/propylene inventories increased by 3.5 million
    barrels last week but are in the lower half of the average range. Total commercial
    petroleum inventories decreased by 10.2 million barrels last week.

    (read this first)

    Total products supplied over the last four-week period averaged about 20.8 million
    barrels per day, up by 2.1% from the same period last year. Over the last four weeks,
    motor gasoline product supplied averaged about 9.7 million barrels per day, down by
    0.8% from the same period last year. Distillate fuel product supplied averaged over 4.1
    million barrels per day over the last four weeks, up by 9.9% from the same period last
    year. Jet fuel product supplied is up 5.6% compared to the same four-week period last

    Posted note:
    Diesel (distillates) along w/ jet fuel higher consumption. {great economic indicator}

  8. Kenz300 on Wed, 19th Jul 2017 3:58 pm 

    Fossil fuels are a bad long term investment.

    Look how fast coal bankruptcies came and the loses for investors.

    Nuclear is next.

    Wind and solar are just cheaper. Cheaper WINS !

  9. george on Thu, 20th Jul 2017 12:12 pm 

    Does anyone still heat their homes with oil ?
    Perhaps in the northeast ?

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