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Page added on November 1, 2016
Zombie Drillers: A Halloween Horror Story For Oil Markets
Investors may not realize it, but the Walking Dead is not the only zombie show running right now. The oil markets are at least as scary and have zombies that are much harder to kill than AMC’s popular program. While about 100 oil companies have gone bankrupt in 2015 and 2016, almost none of those companies have actually “died”. Instead, most of the firms are still pumping oil just as rapidly as before. That, in turn, has significant implications for investors in the market.
The 70 bankrupt firms are producing roughly 1 million bpd of oil – about the same level of production they had before bankruptcy. Those zombie firms represent around 5 percent of U.S. production and there are no signs of that production declining. The theory that bankruptcy would reduce oil production was always flawed. Producers have largely gone bankrupt under Chapter 11 provisions, which in turn has allowed them to keep producing oil and paying upkeep expenses, while at the same time shedding their debt burden.
Midstates Petroleum provides a good example of the problem with zombie production. The firm filed for bankruptcy on April 30th. It began drilling a new oil well the next day. While Midstates stopped running some rigs ahead of its bankruptcy filing, it kept another going after filing. Firms like Midstates have also continued to honor oil service and rig contracts based on drilling plans that were put in place months in advance. Those drilling plans enable the bankrupt firms like Midstates to continue generating revenue and cash flow on behalf of creditors. Bondholders and banks have every incentive to keep the oil and the cash flowing.
The zombie problem is set to become even more acute if Schlumberger, Haliburton, and Baker Hughes make good on the recent implied threat to begin adhering to greater price discipline. Schlumberger’s CEO was recently quoted as saying that the company planned to only take on profitable contracts going forward, and that they were willing to give up market share if it meant avoiding deals that were not justified by the economics. In other words, pricing concessions are a thing of the past. If the major oil services firms hold to that line, then many of the productivity gains and cost cuts that have let E&P firms survive the downturn could prove illusory. Removing the armor of cost cuts would leave the market more exposed to the currently stagnant and still weak oil price. Without that armor, zombies may have greater power in the market.
The reality is that these zombie companies are a true nightmare for the oil markets. Being “dead” already, they have nothing to lose and so there only goal is to keep producing as much as possible as fast as possible. Without a head (executive) to take out, the markets can do little but watch in horror as zombie producers keep eating away and destroying the brains of the oil market trying to rationalize production and prices.
By Michael McDonald of Oilprice.com
10 Comments on "Zombie Drillers: A Halloween Horror Story For Oil Markets"
Shortend on Tue, 1st Nov 2016 7:52 am
Pump, Baby, Pump!
onlooker on Tue, 1st Nov 2016 7:57 am
Welcome to the end game of the Oil Industry as we have known it. Producers all out pumping trying to maximize profits despite prices that are uneconomical to them and so drawing down dwindling reserves even while not having anymore oil plays ready to come online as replacement
IShitOnTruthHasALiberalBias on Tue, 1st Nov 2016 8:01 am
From the above :
Producers have largely gone bankrupt under Chapter 11 provisions, which in turn has allowed them to keep producing oil and paying upkeep expenses, while at the same time shedding their debt burden.
This proves that it is not debt that will kill industrial society as Gail and other claims but the lack of net energy.
The system has find ways to keep oil extraction going even if companies are financial bankrupt with huge load of debts.
All these people saying that debts are a big issue are too stupid to see that money is not real and money rules can be bend and new rules invented.
makati1 on Tue, 1st Nov 2016 8:07 am
Lol. And some are too stupid to see that the financial system is about to collapse and take down all of the energy systems and everything else. Or a world war will also work. Or both. Be patient.
Sissyfuss on Tue, 1st Nov 2016 8:29 am
I pee on and I crap on sounds a lot like I fart on Boat. Or not.
farmlad on Tue, 1st Nov 2016 8:33 am
1 million barrels would be more like 12% of US production
rockman on Tue, 1st Nov 2016 9:01 am
“The 70 bankrupt firms are producing roughly 1 million bpd of oil – about the same level of production they had before bankruptcy. Those zombie firms represent around 5 percent of U.S. production”. Exactly laddie. I’ll dig for it later but I seriously doubt the 1 mm bopd figure. Most of the companies filing are shale players. That 1 mm bopd would represent closer to 20-25% of current shale production…even less credible.
“Schlumberger’s CEO was recently quoted as saying that the company planned to only take on profitable contracts going forward…”. LMFAO. Big Blue has never worked on project they didn’t expect to be profitable. Not once.
Apneaman on Tue, 1st Nov 2016 10:02 am
Alabama’s Colonial Pipeline explodes near site of previous leak, injures 6
“Plagued by a severe drought after weeks without rain, the section of the state where the explosion happened has been scarred by multiple wildfires in recent weeks, and crews worked to keep the blaze from spreading across the landscape.”
http://globalnews.ca/news/3037102/alabamas-colonial-pipeline-explodes-near-site-of-previous-leak-injures-7/
At ground zero of Alabama’s drought: ‘It’s an agricultural disaster’
http://www.desdemonadespair.net/2016/10/at-ground-zero-of-alabamas-drought-its.html
Have the fossil fuel kings (and innocents) been nailed by one of their own externalities again? Nhaa,
tell yourself the drought is just natural variability 😉 – sleep better that way.
orbit7er on Tue, 1st Nov 2016 1:21 pm
“This proves that it is not debt that will kill industrial society as Gail and other claims but the lack of net energy.
The system has find ways to keep oil extraction going even if companies are financial bankrupt with huge load of debts.”
Bankrupt companies may keep their oil flowing but the hundreds of billions pouring into fossil fuel investments by the Greenwashed Big Banks is certainly not going to keep flowing in the same fashion. Those fossil fuel investors have been burned and are very unlikely to plunge back into shady investments like the $3.7 Billion for the Dakota Access pipeline to take declining shale oil production to ports for export overseas…
rockman on Tue, 1st Nov 2016 9:37 pm
“Those fossil fuel investors have been burned and are very unlikely to plunge back into shady investments like the $3.7 Billion for the Dakota Access pipeline…”.
FYI: DAP is not being funded by any investors. It will be built and paid for by Energy Transfer Pipeline. ETP is US a public company that owns Panhandle Eastern Pipe Line Company, LP and Lone Star NGL LLC, which owns and operates natural gas liquids storage, fractionation and transportation assets. In total, ETP currently owns and operates approximately 62,500 miles of natural gas and natural gas liquids pipelines.
ETP also owns ETE: the ETE family owns and operates approximately 71,000 miles of natural gas, natural gas liquids, refined products, and crude oil pipelines. ETP also owns Sunoco: a master limited partnership that operates approximately 1,340 convenience stores and retail fuel sites and distributes motor fuel to convenience stores, independent dealers, commercial customers and distributors located in 30 states at approximately 6,800 sites.
And lastly the DAP won’t be moving the ND oil to ports for export: it will terminate in Patoka, Illinois.
And the DAP will be built on the basis of a full “subscription”. Such expensive pipeline projects don’t happen unless a sufficient number of potential customers financially subscribe and guarantee a minimum amount of throughput. IOW the profit is essentially locked in before the first joint is laid.
Apparently Wall Street and the company’s shareholders are optimistic about the potential of DAP with the latest activity: the stock has increased 80% since last February. Pipeline investment strategies exist in a very different universe the oil/NG development strategies. How many oil companies have seen their stock price almost double this year?