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Page added on January 11, 2016

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Half of US shale drillers may go bankrupt

Half of U.S. shale oil producers could go bankrupt before the crude market reaches equilibrium, Fadel Gheit, said Monday.

The senior oil and gas analyst at Oppenheimer & Co. said the “new normal oil price” could be 50 to 100 percent above current levels. He ultimately sees crude prices stabilizing near $60, but it could be more than two years before that happens.

By then it will be too late for many marginal U.S. drillers, who must drill into and break up shale rock to release oil and gas through a process called hydraulic fracturing. Fracking is significantly more expensive than extracting oil from conventional wells.

“Half of the current producers have no legitimate right to be in a business where the price forecast even in a recovery is going to be between, say, $50, $60. They need $70 oil to survive,” he told CNBC’s “Power Lunch.”

At current oil prices, companies both large and small — including ExxonMobil and Chevron — will have to think twice about their dividend, Gheit added. Oil majors have so far resisted pressure to cut dividends.

U.S. crude fell to a fresh 12-year low below $31 on Monday, while Brent declined to the lowest level since April 2004. On Monday, Morgan Stanley joined Goldman Sachs in saying oil could fall as low as $20 a barrel.

Such a drop would be brief because supply and demand are beginning to come into balance, John LaForge, co-head of real assets at Wells Fargo, told “Power Lunch” on Monday. Once oil bottoms, it takes an average of two months for energy stocks to bottom, he said.

But a number of producers would enter bankruptcy even with crude near $30 per barrel, he added, noting that roughly 25 percent of exploration and production companies went bankrupt after the oil bust of 1986.

The S&P 500 energy sector ended 2015 down 24 percent. Fourth-quarter earnings for the category are expected to decline nearly 70 percent year over year, according to S&P Capital IQ.

U.S. drillers are now spending more than they are making from operations, a situation that Gheit said is unsustainable and will eventually force prices higher.

“The oil industry needs a minimum amount of investment to keep oil supply in line with demand,” he said. “Even if the demand in China is not as strong as we thought … the current investment right now would not be sufficient enough to bring additional production to meet global demand.”

Oil prices have fallen about 70 percent from their highs in the summer of 2014. The rout accelerated after OPEC, led by top oil exporter Saudi Arabia, declined to enforce production cuts among members of the cartel, a strategy that has supported crude prices in the past.

Gheit said he believes the Saudis will not allow prices to recover until they “take care” of U.S. shale producers, who have contributed to global oversupply as American production has more than doubled since 2008.

The Saudis are also looking to settle the score with Russia and Iran, both of whom are on opposite sides of regional conflicts and are dependent on oil revenues, Gheit said.

CNBC



42 Comments on "Half of US shale drillers may go bankrupt"

  1. Davy on Mon, 11th Jan 2016 6:56 pm 

    It’s more complicated than just the oil market. We have multiple unwinds at different levels. Currencies, commodities, and markets are all in a route. Demand supporting countries are seeing rate of growth contractions in their real economy. Fundamentals are in conflict.

    This latest round of turbulence has the potential to force panicked price discovery. The real value of many different trades and markets will be forced with a potential ugly outcome. If this was just an “Oil Thang” but this is an “everythang”.

  2. makati1 on Mon, 11th Jan 2016 8:04 pm 

    Awww! Only half? LOL

  3. adonis on Mon, 11th Jan 2016 8:21 pm 

    the end is nigh

  4. bug on Mon, 11th Jan 2016 9:21 pm 

    Mak, think about all the companies that supply the 50% that go, that is IMO, where the real carnage takes place.

  5. makati1 on Mon, 11th Jan 2016 10:16 pm 

    bug, yep! The dominoes will take down 99.99% of the supply chain. THAT is why it will never recover.

  6. twocats on Mon, 11th Jan 2016 11:26 pm 

    http://www.zerohedge.com/news/2016-01-11/very-unusual-move-avenue-capitals-junk-bond-fund-stops-reporting-asset-levels

    These are the type of jagoffs that are keeping the energy sector on life support. If one or two of these guys fold the energy sector folds. High Yield funds are imploding and investors are probably just now pulling out what remains of their capital en-masse as they finally finally “throw in the towel”.

    The one fund, Avenue Credit Strategies Fund, the one no longer showing assets – I checked, and it’s a $1 million minimum to invest, so these are large institutional investors (read – slow to react and only after they’ve had like 20 committee meetings) and are losing lots and lots of sleep right now. I’d imagine a few have already committed suicide.

    From the article:

    “The expert investor said he sees “a ton of opportunities” in the energy sector – but not in equities. Instead he said his firm is buying debt that sees a coupon of about 12 percent “while you’re getting paid to wait.” He projected that, in the next two to five years, “you’re either going to get paid off, or you’ll end up owning these companies” as debt is converted into equity.”

    So there you have it, these energy companies are paying 12% on their bonds, which is pretty hefty, and the people on the other end would just as soon see them fail since they are first in line. But first in line for what? Rigs they probably have been skipping maintenance on so that they could pay interest on bonds? Leases set to expire?

  7. Apneaman on Tue, 12th Jan 2016 12:13 am 

    The Carbon Bubble is Bursting

    “I admit it. I felt sorry for those poor, duped oil, gas and coal company investors back during the early part of 2015. Many of these guys, fed a constant stream of bad information from the financial news sources, at the time were still enraptured by the notion that fossil fuel stocks were then cheap and that the situation was nothing more than some kind of golden buying opportunity.

    Now, six months later, 41 US oil and gas companies have gone bankrupt, powerful major oil companies like Exxon and BP are in the range of 20-40 percent losses in stock price year-on-year, most gas companies have seen even more severe losses, and most coal companies have been reduced to junk stock status (see Arch Coal declares bankruptcy). TransCanada, the parent company of the canceled Keystone XL Pipeline, is challenging United States sovereignty with its 15 billion dollar lawsuit. But it’s questionable if the company will even exist long enough to see the results of its NAFTA-based legal challenge”

    “And now the markets are being driven to the brink by just such a terrible malinvestment. Now major fossil fuel supporters are crying crocodile tears to their friends in Congress — asking them to shore up these big, polluting, malinvesting fossil fuel special interests. In other other words — the fossil fuel industry has now gone panhandling to the US government for a bailout after a risky and speculative oil and gas production binge. The fruits of drill-baby-drill thinking resulting in both economic and environmental collapse.”

    http://robertscribbler.com/2016/01/11/the-carbon-bubble-is-bursting-2015-was-a-terrible-year-to-be-fossil-fuel-investor-why-2016-will-be-worse/

  8. Apneaman on Tue, 12th Jan 2016 12:21 am 

    Whatever happened to the loud and certain “Shale Revolution” cheerleaders around here?

    WAHWAH! WAHWAH! WAHWAH! WAHWAH! WAHWAH! WAHWAH! WAHWAH! WAHWAH! WAHWAH!

    Oil plunge sparks calls for Congress to act

    “Another top priority for the two Republicans is loosening environmental and other regulations. But moves in that direction are highly unlikely while a Democrat remains in the White House.”

    “Some lawmakers are floating the possibility of taking retaliatory trade measures against Saudi Arabia, which has flooded the market with cheap oil in what some analysts see as a bid to drive America’s growing shale oil industry out of business.”

    http://thehill.com/homenews/senate/265304-oil-plunge-sparks-calls-for-congress-to-act

  9. makati1 on Tue, 12th Jan 2016 12:47 am 

    Ap, perhaps they tried to make a ‘soft landing’ from a very high place, without a chute? The suicide rates in America are going up, up and away.

  10. Apneaman on Tue, 12th Jan 2016 1:10 am 

    mak, in many many places along with addictions of every sort. It’s still early days – many men are going to have their souls tried coming up.

  11. rockman on Tue, 12th Jan 2016 5:32 am 

    “U.S. drillers are now spending more than they are making from operations”. Actually that’s SOP during a boom: capex typically exceeds revenue in the early days. Thus the deep debt hole companies often dig themselves into.

    “Some lawmakers are floating the possibility of taking retaliatory trade measures against Saudi Arabia, which has flooded” Given that during the great KSA “oil flood” it increased production by only 6.7% I suspect such an effort would be laughed at by most. Additionally I seem to recall the POTUS asking the KSA to increase production a couple of years ago. And they responded by increasing production 9.8% from March 2013 to August 2013. Actual since the time that the US govt pressed for the KSA to increase production in the spring of 2013 to today they are only producing 0.5% more. Hardly what anyone could describe as “dumping”.

    OTOH since the spring of 2013 US has increased production 29%. If anyone should be accused of “flooding the market” it’s the US.

  12. bug on Tue, 12th Jan 2016 6:11 am 

    Go to the bayous in South Louisiana and check out the offshore supply vessels, jack-ups and oil field equipment all sitting idle. Some of the vessels are 1,2,3 years old, some new and tied up.
    All with payments due every month.
    No crew to maintain them, this is carnage.
    But, everyday there is a spiffy article saying “Oil will rebound in 2016,2017,2018 or 2020, it’s so sad.

  13. JuanP on Tue, 12th Jan 2016 6:17 am 

    RBS says sell everything now! https://www.rt.com/business/328607-rbs-2016-markets-oil/

  14. Davy on Tue, 12th Jan 2016 7:36 am 

    One important line in the reference bellow by respected analyst Deutsch Bank’s Jim Reid:

    “Our view in the outlook was that we may have one more year left in the cycle before more difficult times arrive. Obviously the start of the year trading has increased the risks that this is too optimistic but we maintain our view for now” More

    Rabobank: “Everyone Rational Wants To Sell, While Everyone Official Has Been Told To Buy”

    http://www.zerohedge.com/news/2016-01-12/rabobank-everyone-rational-wants-sell-while-everyone-official-has-been-told-buy

    “Even if state funds come in to defend the 3,000 level, it may not ultimately work, according to Michael Every, head of financial markets research at Rabobank Group in Hong Kong.”

    “Everyone rational wants to sell, while everyone official has been told to buy,” said Every. “By throwing good money after bad, it just delays the inevitable.”

    And then, a close runner up, is Deutsche Bank’s Jim Reid who in his overnight note, explains just why “everyone official has been told to buy”

    “It doesn’t paint a particularly joyous outlook for global investors and supports our view that financial markets are broken but have been propped up by immense artificial central bank activity. We still think central bankers can still be relevant when inflation is so low (assuming no policy error) but we do think we’re late cycle. Our view in the outlook was that we may have one more year left in the cycle before more difficult times arrive. Obviously the start of the year trading has increased the risks that this is too optimistic but we maintain our view for now. All in all it is a low visibility financial world with China having the ability to dictate performance with limited ability to analyse it properly in real time.”

  15. Davy on Tue, 12th Jan 2016 8:42 am 

    A key word from the reference bellow is “Panic” in China

    “After “Murderous” Squeeze, China Boosts Capital Controls By Ordering Banks To Limit Yuan Outflows”

    http://www.zerohedge.com/news/2016-01-12/after-murderous-liquidity-squeeze-china-boosts-capital-controls-ordering-banks-limit

    “This takes place after overnight the PBOC unleashed a “murderous” liquidity squeeze, which sent the deposit rate on the offshore Yuan to 66%, or an overnight widowmaker for anyone who was short the currency. What happens next? Most likely a rerun of September, when a comparable (failed) attempt to boost capital controls and preserve capital outflow simply lead the public to find more effective ways to evade said capital controls… and also lead to a doubling of bitcoin in 4 months. Finally, how long before it becomes obvious to everyone that what is going on in among the top echelons of power in China can be summarized with one word: panic.”

  16. rockman on Tue, 12th Jan 2016 8:51 am 

    Juan – “”Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” said the bank’s credit team in a note sent to clients”. I would be more impressed with their insights had then recommended sell before the bottom dropped out. Kinda like telling Capt. Smith to slow down after he hit the iceberg. LOL.

  17. shortonoil on Tue, 12th Jan 2016 9:25 am 

    The price of oil is range bound; its minimum is its lifting cost; which is the point where a producer’s cash flow goes negative. It maximum is the point where the cost of the oil used becomes equal to the economic activity it can drive. That is a property of how much energy a unit of oil can deliver to the economy. It is simply equivalent to the statement that no one can use $2 worth of oil to produce a $1 worth of goods and services:

    We calculated those points, which for the maximum is a moving target, over 2 years ago and put up this page 17 months ago:

    http://www.thehillsgroup.org/depletion2_022.htm

    The long range price of oil is down. The highest cost producers will continually be priced out of the market. Shale, bitumen, ultra deep water, and high sulfur extra heavy will be the first to go. They are the most energy intensive to produce of the world’s petroleum resources. As the highest cost producers leave the market the demand that they generated will leave with them. It requires energy to produce oil and its products. Capital expenditures will decline, and so also will the jobs that were required for the production of the oil. In the case of the most energy intensive products, like shale, the decline in demand will be about equal to its production.

    Oil prices are set primarily by inventory levels, and the expectation of what those levels will be in the future. A unit of oil no longer supplies enough energy to drive the economic activity required to buy all of that unit in the market. Inventories will consequently continue to increase, and prices will continue downward. Bankruptcies in shale will just be the beginning of what is in store for the world’s petroleum industry!

    http://www.thehillsgroup.org/

  18. Kenz300 on Tue, 12th Jan 2016 9:50 am 

    The world is in transition to safer, cleaner and cheaper alternative energy sources. Clean energy is the future….fossil fuels are the past……

    There Are Now More Solar Jobs In America Than Oil Jobs

    http://www.huffingtonpost.com/entry/solar-jobs-rising_569409e5e4b0cad15e65be87

  19. Robert Spoley on Tue, 12th Jan 2016 11:18 am 

    Calling all oil companies the “same” is ridiculous. The horizontal crowd usually only does horizontal stuff along with that niches’ problems. The vertical crowd usually only does that that thing along with its’ associated problems. About the only thing they have in common is the price/demand thing. I’m guessing that the bulk of the bad debt situation is with the horizontal crowd and not the vertical guys. This morning it was revealed that a local lawsuit was filed against 12 oil companies over earthquake damages/problems in central Oklahoma. Suit was against both vertical and horizontal groups because they both have salt water disposal facilities although only some operate high volume disposal wells. This earthquake thing is gaining momentum and may change the horizontal side a lot faster than price/demand factors. I’m guessing that the vertical crowd will skate through relatively unscathed since their disposal wells handle only a small fraction of the sw that the wells disposing of sw from horizontal producers handle and at much lower pressures and into more porous formations with greater permeability. Just saying.

  20. Dredd on Tue, 12th Jan 2016 12:37 pm 

    The sooner the better (The Common Good – 11).

  21. rockman on Tue, 12th Jan 2016 1:02 pm 

    “I’m guessing that the vertical crowd will skate through relatively unscathed since their disposal wells handle only a small fraction of the sw that the wells disposing of sw from horizontal producers handle and at much lower pressures and into more porous formations with greater permeability. Just saying.” I doubt that’s the case Robert. First, probably much of the salt water from any hz wells is going to commercial SWD sites. Those individual leases don’t produce enough sw to justify their own SWD wells. I have searched looking for details but have found not enough.

    As far as the nature of the sw injection zones it matters not if the water came from a vert or hz well. Understand that the state geologic survey itself says that there’s no involvement of the hz wells themselves so those higher frac pressures aren’t relevant any way. Their focus is strictly on the SWD wells. As I mentioned before those law suites are going to face a major hurdle: why earth tremors in just the last few years since most of the current SWD wells have for decades been injecting BILLIONS of bbls of water. In fact this latest HUGE swarm of tremors almost benefits the sw disposal companies: they are coming with much greater frequency then even the OK state or USGS geologists can explain. They are occurring at depths much greater than the injection zones. In fact some of the latest concerns being posted have begun to focus more on region aspects of the tremors as opposed to local situations. Remember all of OK sits above a major “intracratonic instability zone”…as opposed to continental edge instability as the have on the west coast. This IIZ that OK sits on top of was the source of the strongest earth quake to every occur in the US during historical times: the New Madrid earth quake in the late 1800’s. They estimated that up to 500,000 folks could die if the same magnitude quake happened in the same area today.

  22. Apneaman on Tue, 12th Jan 2016 1:37 pm 

    I guess there is no upper limit on the number of human externalities that will be sacrificed to the cancer fossil fuel industry to keep it going for just awhile longer. I can’t wait for the whole rotten, corrupt, stinking, maggot infested industry to die. Fucking cancer monkeys.

    ‘This is a mini-Chernobyl’: LA County supervisor on California methane leak

    “Public health officials are concerned about the potential health effects of benzene, a known carcinogen that is added to gas in order to help detect leaks when they occur.

    “For about the first three weeks of November, there were levels of benzene being sampled in the community that were considerably higher than expected in the LA basin, and were likely to be higher than the government exposure level for eight-hour exposure,” Michael Jerrett, the chair of UCLA’s environmental health sciences department, told The Guardian.

    On November 10, the company recorded benzene levels nearly six times higher than the safe limits for an exposure period over eight hours, the scientist said.

    “If it was just two or three days, it would be one thing,” he said. “It made me think there were longer periods of time where these exposure levels were present.”

    https://www.rt.com/usa/328591-mini-chernobyl-losangeles-methane-leak/

  23. twocats on Tue, 12th Jan 2016 1:47 pm 

    http://thehill.com/homenews/senate/265304-oil-plunge-sparks-calls-for-congress-to-act

    I love this article. It reveals so much of how the economies, politics, and everything else comes together into a soup of competing interests and ideologies. This article is why I never really believed in the One-World Order Conspiracy: too many idiots with money and power.

    There two big answers to oil industry implosion: loosen regulations so that we can produce and export more oil (that’s SURE to work!); sanction on Saudi Arabia. My god, the Onion couldn’t have written it better!

  24. twocats on Tue, 12th Jan 2016 1:52 pm 

    Katrina, Fukushima, BP Oil Disaster, Aliso Cancer Canyon. When diminishing energy returns leads to cost-and-corner-cutting which meets Time. It’s the rolling disaster complex and a strong argument in favor of staying liquid and mobile.

  25. onlooker on Tue, 12th Jan 2016 1:58 pm 

    Cost and corner cutting along with corruption are just part of the way governments and corporations have always done things. They never have cared about people, profits oh yes.

  26. Apneaman on Tue, 12th Jan 2016 2:05 pm 

    Looker, as with the rest of the corruption in every institution, it’s the increased scale and degree. Kunstler defined the new normal as everything goes and nothing matters.

  27. twocats on Tue, 12th Jan 2016 2:05 pm 

    Having worked in several companies I would say that owners rationalize their maintenance and take risks they normally would not be comfortable with when in a solid cash flow environment. So even those not corrupt and wanting to follow regulations (even if they don’t agree with them) get closer and closer to the edge out of sheer necessity.

  28. twocats on Tue, 12th Jan 2016 2:11 pm 

    Looker, as with the rest of the corruption in every institution, it’s the increased scale and degree. Kunstler defined the new normal as everything goes and nothing matters. [ap]

    that’s another angle. we are in the age of unbounded corruption. there used to be a culture of (i can’t think of the exact right word) so I’ll just say honesty. You can talk about American empire all you want but for a lot of the post-WWII era this was actually a thing and people believed it and the vast majority of middle-bureaucracy and management actually practiced it.

  29. twocats on Tue, 12th Jan 2016 2:12 pm 

    the big question is whether or not this societal breakdown into corruption is IN LARGE PART driven by less energy available per capita.

  30. onlooker on Tue, 12th Jan 2016 2:18 pm 

    Yes because transactions between people and entities ultimately can work based on some level of mutual trust. Well now my theory is that all the big wigs of the Corporate world know or sense the approach of the Great Unraveling, so they’re is a sense of get yours while the getting is good, if you know what I mean. So all this translates into corruption on steroids.

  31. Davy on Tue, 12th Jan 2016 2:39 pm 

    Onlooker, I disagree on the corporate leaders description. You are giving them too much credit for intelligence. You are also discounting their conformational bias that comes with a narrow and specialty work environment. There are a sub group that are further connected and really smart that get a better picture but not all. Many corporate big-wigs are just normal people. Many are smart and hardworking. Many were lucky. Many a person has failed in the climb to the top. There are a group that are completely incompetent and stupid really. This group has money and power but do nothing and many are actually a liability to their enterprise.

    I tell you this because over the years I have met many. I was also an owner once. I would say at the level of the very large corporations where they are close to the power centers you have more of the kind of people you described. Really it only takes a few to run things and make a difference. Most are just cogs in the wheel.

  32. Apneaman on Tue, 12th Jan 2016 2:58 pm 

    Ass-Kisser Promoted

    http://www.theonion.com/article/ass-kisser-promoted-857

    The ‘Self-Made’ Myth: Our Hallucinating Rich

    In real life, working hard only takes you so far. Those who go all the way — to grand fortune — typically get a substantial head start. So documents a new analysis of the Forbes 400.

    http://inequality.org/selfmade-myth-hallucinating-rich/

  33. onlooker on Tue, 12th Jan 2016 3:01 pm 

    I am not so sure about that Davy, I think the neon lights are shining way too bright and too many shining not to notice what deep doo doo we are in. If nothing else the environment maladies are all around and just getting worse. Not to say that their are not some who are doing like the ostrich burying their head in the sand.

  34. onlooker on Tue, 12th Jan 2016 3:08 pm 

    You know my parents are migrants and I never ever fell for the myth of “The sky’s the limit if you just work hard, or everybody can become rich in America” Then again I never developed a great fondness for accumulating the almighty dollar.

  35. Davy on Tue, 12th Jan 2016 3:19 pm 

    You are missing my point onlooker. I have met some real idiots. I mean these guys are dumb shits in suits. In fact I would say money insulates many from reality. Too many of these business leaders don’t even do much. They are parasites of their enterprise and society. I have met some really smart and gifted people also. My main point is corporate leadership is not something to admire in regards to smarts in and of itself. Some are intelligent and hard workers in their narrow niche but take them out of that niche and many are no better than an uneducated sheeple. This group is going to be really disadvantaged once their position of privilege is gone.

  36. Apneaman on Tue, 12th Jan 2016 3:31 pm 

    In the corporate/gov world, critical thinking is career suicide.

    “School Daze” – Inspired by John Taylor Gatto

    https://www.youtube.com/watch?v=1JetQkrmSMA

  37. Apneaman on Tue, 12th Jan 2016 4:24 pm 

    How Debt Conquered America

    https://consortiumnews.com/2016/01/08/how-debt-conquered-america/

  38. shortonoil on Tue, 12th Jan 2016 4:26 pm 

    “the big question is whether or not this societal breakdown into corruption is IN LARGE PART driven by less energy available per capita.”

    That is the $64,000 question for which there is no quantifiable answer. Lower energy availability has definitely made it more difficult to make money the old fashion way; honesty and hard work. Lower profit potential is likely to generate more crooks. When crime becomes the only way to make money it seems likely that there will be more criminals making an appearance.

  39. shortonoil on Tue, 12th Jan 2016 4:39 pm 

    “Onlooker, I disagree on the corporate leaders description.”

    I have to completely agree. A few of them are really, really smart and hard working. The majority seems to consist of really, really lucky, totally unscrupulous bone heads who would sell out their mothers to get ahead one inch.

  40. Boat on Tue, 12th Jan 2016 9:26 pm 

    Short,

    Lower energy availability has definitely made it more difficult to make money the old fashion way; honesty and hard work.

    Yet another baffling statement by our resident PHD. Yes short you cannot go trapping and sell beaver hats to europe. To make real money you actually have to own the machines that have displaced millions of farmers and workers. To make some money you work for them.

    If you personally want more energy then go buy it.It is not only available but really cheap right now. I would but I use the same amount regardless of the price. Something you doomers might realize at some point.

  41. Kenz300 on Wed, 13th Jan 2016 10:01 am 

    Doing more harm than good……… time to move on to safer, cleaner and cheaper alternative energy sources.

    70 More Earthquakes Hit Oklahoma, Averaging Nearly Three a Day in 2015

    http://ecowatch.com/2016/01/11/fracking-earthquakes-oklahoma/?utm_source=EcoWatch+List&utm_campaign=1fd6621515-Top_News_1_11_2016&utm_medium=email&utm_term=0_49c7d43dc9-1fd6621515-86023917

  42. JuanP on Wed, 13th Jan 2016 10:02 am 

    USA’s oil companies go bankrupt, http://sputniknews.com/business/20160112/1032995811/us-oil-companies-bankrupt.html#ixzz3x24RfoYj


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