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Page added on June 9, 2019

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A “Gusher Of Red Ink” For US Shale

Business

Oil prices are off more about 20 percent in the last two weeks on growing fears of a brewing economic recession. Commodities of all types have been hammered by the pessimism.

“Fear of global economic growth slowing,” said Peter Kiernan, lead energy analyst at the Economist Intelligence Unit (EIU), according to Reuters, “afflicting the entire energy complex with worries that demand growth will be bearish this year.” Prices for coal, natural gas and LNG, and crude oil have plunged.

“The continued escalation in trade tensions and broad-based fall in manufacturing…suggest that the downside risks to growth are becoming more prominent,” Morgan Stanley analysts said in a note.

Yet another downturn could not come at a worse time for U.S. shale drillers, who have struggled to turn a profit. Time and again, shale executives have promised that profitability is right around the corner. Years of budget-busting drilling has succeeded in bringing a tidal wave of oil online, but a corresponding wave of profits has never materialized.

Heading into 2019, the industry promised to stake out a renewed focus on capital discipline and shareholder returns. But that vow is now in danger of becoming yet another in a long line of unmet goals.

“Another quarter, another gusher of red ink,” the Institute for Energy Economics and Financial Analysis, along with the Sightline Institute, wrote in a joint report on the first quarter earnings of the shale industry.

The report studied 29 North American shale companies and found a combined $2.5 billion in negative free cash flow in the first quarter. That was a deterioration from the $2.1 billion in negative cash flow from the fourth quarter of 2018. “This dismal cash flow performance came despite a 16 percent quarter-over-quarter decline in capital expenditures,” the report’s authors concluded.

They argue that the consistent failure for the sector as a whole to generate positive free cash flow amounts to an indictment of the entire business model. Sure, a few companies here and there are profitable, but more broadly the industry is falling short. The “sector as a whole consistently fails to produce enough cash to satisfy its voracious appetite for capital,” the report said. The 29 companies surveyed by IEEFA and Sightline Institute burned through a combined $184 billion more than they generated between 2010 and 2019, “hemorrhaging cash every single year.”

Rystad Energy put it somewhat differently, although came to the same general conclusion.

“Nine in ten US shale oil companies are burning cash,” the Norwegian consultancy said late last month. Rystad studied 40 U.S. shale companies and found that only four had positive cash flow in the first quarter. In fact, the numbers were particularly bad in the first three months of this year, with the companies posting a combined $4.7 billion in negative cash flow. “That is the lowest [cash flow from operating activities] we have seen since the fourth quarter of 2017,” Rystad’s Alisa Lukash said in a statement.

“Recently released data, which confirmed dismal first quarter earnings, only served to cement negative market sentiment,” Lukash said. “While shale operators continue to focus on improving capital efficiency, investors are putting the industry under extreme pressure, leaving no room for undisciplined spending in 2019.”

More than 170 U.S. shale companies have declared bankruptcy since 2015, affecting nearly $100 billion in debt, according to Haynes and Boone. There have been an estimated 8 bankruptcies already this year, with some $3 billion in debt restructured.

“Frackers’ persistent inability to produce positive cash flows should be of grave concern to investors,” authors from IEEFA and the Sightline Institute wrote.

“Until fracking companies can demonstrate that they can produce cash as well as hydrocarbons, cautious investors would be wise to view the fracking sector as a speculative enterprise with a weak outlook and an unproven business model.”

The industry kept humming along over the past few years, riding out multiple downturns due to periodic reinjections of capital from Wall Street. But, investors are beginning to sour on shale drillers. Very little fresh capital has been raised by shale companies, either from new equity or bond issuance, since late last year, according to IEEFA and Sightline.

The industry now finds itself at a cross roads. With capital markets beginning to shun shale drillers, consolidation is likely the direction the industry will take. The best bet for struggling companies now is to find a willing buyer.

But several oil majors have recently said that shale drillers are fooling themselves with their asking prices. “Most of the things we see tend to look overpriced, and we have tried to maintain cool heads,” Royal Dutch Shell’s CFO Jessica Uhl said on Tuesday, according to Argus Media. Exxon’s CEO Darren Woods echoed that, saying last week that there is “not always alignment among buyers and sellers.” ConocoPhillips’ chief executive Ryan Lance said there are “a lot of bid-ask issues in the market today,” adding that an “expectations change” will be needed before more M&A can occur.

The renewed plunge in oil prices may inject a dose of reality into the shale sector. With WTI back in the low-$50s, the pressure on struggling drillers may intensify.

OilPrice.com



13 Comments on "A “Gusher Of Red Ink” For US Shale"

  1. Chrome Mags on Sun, 9th Jun 2019 4:22 pm 

    Scraping the bottom of the EROEI barrel.

  2. Coffeeguyzz on Sun, 9th Jun 2019 4:56 pm 

    Of the several reasons you peakers are, have been, and will continue to be wrong is the – seeming – gullibility to which you, collectively, respond to propaganda such as the above piece by Nick Cunningham.

    Cunningham is a complete neophyte regarding the hydrocarbon industry, loathes it thoroughly, and comes from a background of staunch pro (faux?) environmentalism.

    Two of his cited sources, the Sightline Institute and the IEEFA, are as anti hydrocarbon folks as one may find.
    This is not to say the data is irrelevant or – on its face – inaccurate.

    Rather to be able to recognize that the ‘shading’ is skewed to be anti shale might prompt an actual truth seeker to obtain a clearer, fuller understanding of what is taking place.

    No attempt by moi here to sway anyone as this little backwater teems with frenzied apparatchiks who loathe most American or capitalist endeavors.

    Just a heads up on why you all keep being wrong when trusting sites/authors such as oilpricedotcom and Nick Cunningham.

  3. I AM THE MOB on Sun, 9th Jun 2019 5:15 pm 

    Coffee

    Slandering the messenger isn’t an argument..

    And spare me your identity politics about Nick..

    Time to go to bed Gramps!

    LOL

  4. I AM THE MOB on Sun, 9th Jun 2019 5:18 pm 

    Call immigrant detention centers what they really are: concentration camps
    https://www.latimes.com/opinion/op-ed/la-oe-katz-immigrant-concentration-camps-20190609-story.html

    The Nazi’s are back! The most vile and evil people in the history of mankind!

  5. I AM THE MOB on Mon, 10th Jun 2019 9:30 am 

    White couple gets pummeled on on freeway after calling Latino family ‘beaners’

    https://www.alternet.org/2019/06/watch-white-couple-gets-pummeled-on-on-freeway-after-calling-latino-family-beaners/?utm_source=&utm_medium=email&utm_campaign=309&recip_id=2946&list_id=2

  6. Cloggie on Mon, 10th Jun 2019 11:34 am 

    “White couple gets pummeled on on freeway after calling Latino family ‘beaners’”

    The whites got what they deserved. California is after all “beaner country”, so is Arizona, Nevada, New Mexico, Texas south of River Red.

    I wouldn’t like being called a “cheesehead” in my own country by a Muslim either.

    https://images.app.goo.gl/Ad6JLCfqFSMukCiZ8

    Once taken back by Mexico, these folks can’t be used against Eurasia anymore.

  7. I AM THE MOB on Mon, 10th Jun 2019 2:58 pm 

    Clogg

    Everything you say is a lie..And your map proves nothing.

    And there is no Eurasia and there never will be..Your region is going batshit..And your economy will collapse with a decade..Along with an oil and gas shortage..I can cite the numbers if you want me to..

    Enjoy the fun..

    You dumb low IQ peckerwood!

  8. I AM THE MOB on Mon, 10th Jun 2019 3:01 pm 

    Clogg

    You are so far behind in the race you think you are leading..

    LOL

  9. Cloggie on Mon, 10th Jun 2019 3:45 pm 

    Farakhan adressing La Raza:

    https://youtu.be/7KM_rP3moHM

    Here is a classic written in 2001 on immigration, written by a jew:

    https://cis.org/Report/Jewish-Stake-Americas-Changing-Demography

    Core message: third world immigration is not good for jews, as darkies don’t listen to jews, in contrast to whites. Jews will loose control over a darkening USA.

    But that was 2001. It’s too late now.

    Kiss your last powerbase goodbye.

    https://documents1940.wordpress.com/2018/05/21/european-america-is-over/

    Soon you will be presiding over a pile of rubble.

  10. Robert Inget on Mon, 10th Jun 2019 6:36 pm 

    On topic…. instead.

    The market’s response to below cost of production oil prices, simply OVERPRODUCE.

    If you have ever run deficits but still need to make payroll there’s only a few ways to cope.
    Increase production, selling everything at a loss to create ‘cash flow’, float another stock issue,
    borrow at ‘killer’ interest rates, go bankrupt.

    Eight out of ten oil companies losing money.
    If, if oil guys were making money investors would pretend climate change was ‘fake news’.

    The guy behind the tree is losing his shirt but we can still build and sell over ICE powered pick-up trucks and SUV’s.

    Some here will recall ‘Short on Oil’ who predicted
    when oil became too expensive to drill we would simply do the sane thing and stop.

    (and stop eating?)

    At present, ‘The Administration’ is telling us we have way too much oil.
    (that’s like ‘too much money’ in too few hands)

    Venezuela, by dint of Saudi Arabia’s over production, at this minute has more oil (reserves) than any other on Earth. Yet, yet, people are lined up for days just to get gasoline or diesel at two CENTS a gallon. So cutting prices may not be the solution.

    Even though the North Sea peaked a decade ago,
    the most popular luxury car in Norway is the Tesla.

    Which model should we follow?

  11. Robert Inget on Mon, 10th Jun 2019 6:56 pm 

    Myth Buster;
    “Due to lack of demand we need to cut prices to $40.”

    That’s $40 in 2019/2020 dollars.

    $100 oil in 2020 dollars may be the same BTU’s but not the same $100 purchasing power as when CL was $100.

    Which reminds a person.
    There’s a crazy man making pretend ‘deals’ in the White House and almost everyone is going about
    trying explain events in a calm and reasoned manner.

    For decades most denied ‘smoking’ was killing us.

  12. Davy on Tue, 11th Jun 2019 4:38 am 

    Peak Oil Review: 10 June 2019
    https://tinyurl.com/y4cr6g8x resilience

    “EIA data last week showed a crude supply adjustment factor — the difference between reported stockpiles and those implied by production, refinery demand, imports, and exports — of more than 800,000 b/d. These adjustments now have added up to more than 24 million barrels over the past four weeks. Popular guesses for the discrepancy include missing production from the boom in the Permian Basin, miscounting of imports or exports, or the failure to account for natural gas condensate which ends up in oil stocks. The analysts added that May balances implied robust production, which means U.S oil output may be even higher than the 12.4 million b/d record in last week’s data. Reuters reports that the oil currently produced in the Permian basin is increasingly too light in density for domestic refiners or for foreign buyers. Over the past year, production from the Permian has changed, with more super-light oil coming from the ground, as producers increase drilling in the western part of the basin. This geological phenomenon could have serious implications for the future of shale oil production which is increasingly being concentrated in the Permian Basin. As volumes of lighter shale oil increase and heavy crude supplies shrink, refiners are grappling with the mismatch in the density of oil they require and what the country produces, traders said. US refineries, which are designed to process mostly heavier and medium crudes, are struggling to blend the lighter oil efficiently, market sources said. The problem has grown more acute this year with heavier crude in short supply after US sanctions on Venezuela, production declines in Mexico, and transportation bottlenecks in Canada. The export market for super-light oil is limited because there are only a few refineries designed to handle light crude in Europe. Some Asian petrochemical plants can process very light crude.”

  13. Robert Inget on Wed, 12th Jun 2019 10:57 am 

    Rational industries grow when there are excess profits to be made. Shale is growing when there are no to minimal profits to be made. They should be shrinking, but too many companies have their decisions driven by the need for even unprofitable cash flow to service their excessive debt. This consumes the asset base solely to pay creditors, a decision which causes continual losses to equity holders.

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