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Financial Carnage Continues To Gut Industry


As the Mainstream media reports about the next phase of the glorious U.S. Shale Oil Revolution, the financial carnage continues to gut the industry deep down inside the entrails of its horizontal laterals.  The stench of fracking fluid must be driving shale oil advocates utterly insane as they are no longer able to see financial wreckage taking place in these companies quarterly reports.

This weekend, one of my readers sent me the following Bloomberg 45 minute TV special titled, The Next Shale Revolution.  If you are in need of a good laugh, I highly recommend watching part of the video.  At the beginning of the video, it starts off with President Trump stating that the U.S. has become an energy exporter for the first time ever.  Trump goes on to say, “that powered by new innovation and technology, we are now on the cusp of a new energy revolution.”  While I have to applaud Trump’s efforts for putting out some positive and reassuring news, I wonder who is providing him with terribly inaccurate energy information.

I would kindly like to remind the reader; the United States is still a NET IMPORTER of oil.  We still import nearly six million barrels of oil per day, but we export some finished products and a percentage of our shale oil production.  Thus, we still import a net of approximately three million barrels per day of oil.

A few minutes into the Bloomberg video, both Pioneer Resources Chairman, Scott Sheffield, and Continental Resources CEO, Harold Hamm, explain how advanced technology will revolutionize the shale oil industry and bring down costs.  I find that statement quite hilarious as Continental Resources and Pioneer continue to spend more money drilling for oil and gas then they make from their operations.  As I stated in a previous article, Continental Resources long-term debt ballooned from $165 million in 2007 to $6.5 billion currently.  So, how did advanced technology lower costs when Continental now has accumulated debt up to its eyeballs?

Of course… it didn’t.  Debt increased on Continental Resources balance sheet because shale oil production wasn’t profitable… even at $100 a barrel.  So, now the investor who purchased Continental bonds and debt are the Bag Holders.

Regardless, while U.S. oil production continues to increase at a moderate pace, there are some troubling signs in one of the country’s largest shale oil fields.

Shale Oil Production At the Mighty Eagle Ford Stagnates As Companies’ Financial Losses Mount

It was just a few short years ago that the energy industry was bragging about the tremendous growth of shale oil production at the mighty  Eagle Ford Region in Texas.  At the beginning of 2015, Eagle Ford oil production peaked at a record 1.7 million barrels per day (mbd).  Currently, it is nearly 500,000 barrels per day lower.  According to the EIA – U.S Energy Information Agency’s most recently released Drilling Productivity Report, oil production in the Eagle Ford is forecasted to grow by ZERO barrels in December:

The chart above suggests that the companies drilling and producing oil in the Eagle Ford spent one hell of a lot of money, just to keep production flat.  Even though the shale oil producers were able to bring on 88,000 barrels per day of new oil, the field lost 88,000 barrels per day due to legacy declines.  We need not take out a calculator to understand production growth at the Eagle Ford is a BIG PHAT ZERO.

Here are the five largest shale oil and gas producers in the Eagle Ford where:

  1. EOG Resources
  2. ConocoPhillips
  3. BHP Billiton
  4. Chesapeake Energy
  5. Marathon Oil

The company that doesn’t quite fit in the energy group above is BHP Billiton.  BHP Billiton is one of the largest base metal mining companies in the world.  Unfortunately for BHP Billiton, the company decided to get into U.S. Shale at the worst possible time.  BHP Billiton bought shale oil properties when prices were high and eventually had to liquidate when prices were low.  A Rookie mistake made by supposed professionals.  I wrote about this in my article; DOMINOES BEGIN TO FALL: BHP Chairman Says $20 Billion Shale Investment “MISTAKE.”

I decided to take a look at the current financial reports published by the five companies listed above.  The largest player in the Eagle Ford is EOG Resources.  I went to YahooFinance and created the following Cash Flow table for EOG:

In the latest quarter (Q3 2017), EOG reported $961 million in cash from operations.  However, the company spent $1,094 million on capital (CAPEX) expenditures and another $96 million in shareholder dividends.  Applying simple arithmetic, EOG spent $229 million more on CAPEX and dividends than it made from its operations.  Maybe someone can tell me how advanced technology is bringing down the cost for EOG.

The next largest player in the Eagle Ford is ConocoPhillips.  If we look at ConocoPhillips net income at its different business segments, we can see that the company isn’t making any money producing oil and gas in the lower 48 states:

While ConocoPhillips enjoyed a $103 million profit in Alaska, it suffered a $97 million loss in the lower 48 states.  Thus, the third largest oil company in the U.S. isn’t making any money producing oil and gas in the majority of the country.  According to the data, ConocoPhillips produced twice as much oil and gas in the lower 48 states then what they reported in Alaska, but the company still lost $97 million.

The third largest company producing oil in the Eagle Ford is BHP Billiton.  Instead of providing financial results, I thought this chart on BHP Billiton’s Return On Capital Employed was a better indicator of how bad their U.S. Shale assets were performing.  If we look at the right-hand side of the chart, BHP Billiton’s shale oil resources have become one hell of a drag on the company’s asset portfolio:

While BHP Billiton is enjoying a healthy positive Return On Capital Employed on most of its assets, shale oil resources are showing a negative return.  Furthermore, the company makes a note to above stating, “Detailed plans to improve, optimize or EXIT.”  I would bet my bottom Silver Dollar that their decision will end up “EXITING” the wonderful world of shale energy, with the sale of their assets for pennies on the dollar.

Moving down the list to the next shale company, we come to Chesapeake.  While Chesapeake is the country’s second-largest natural gas producer, the company has been losing money for more than a decade.  Unfortunately, the situation hasn’t improved for Chesapeake as its current financial statement reveals the company continues to burn through cash to produce its oil and gas:

Chesapeake’s net cash provided by its operating activities equaled $273 million for the first three-quarters of 2017.  However, the company spent a whopping $1,597 million on drilling and completion costs (CAPEX).  Thus, Chesapeake spent $1.3 billion more on producing its oil and natural gas Q1-Q3 2017 than it made from its operations.  Again, how is advanced technology making shale oil and gas more profitable?

If it weren’t for the asset sale of $1,193 million, Chesapeake would have needed to borrow that money to make up the difference.  Regrettably, selling assets to fortify one’s balance sheet isn’t a long-term viable business model.  There are only so many assets one can sell, and at some point, in the future, the market will realize those assets will have turned into worthless liabilities.

Okay, we finally come to the fifth largest player in the Eagle Ford…. Marathon Oil.  The situation at Marathon isn’t any better than the other companies drilling and producing oil in the Eagle Ford.  According to the companies third-quarter report, Marathon suffered a $600 million net income loss:

Again, we have another example of an energy company losing a lot of money producing shale oil and gas.  You will notice how high Marathon’s Depreciation, depletion, and amortization are in both the third-quarter and nine months ending on Sept 30th.  While some may believe this is just a tax write off for the company… it isn’t.  Due to the massive decline rate in producing shale oil and gas, PLEASE SEE the FIRST CHART ABOVE on the EAGLE FORD GROWTH OF ZERO, these companies have to write off these assets as it represents the BURNING of CASH.

For example, Marathon reported cash from operations of $1,487 million for Q3 2017.  However, it spent $1,305 million on CAPEX and $128 million on dividends for a total of $1,433 million.  Thus, Marathon actually enjoyed a small $53 million in positive free cash flow once dividends were deducted.  But, that is only part of the story.  If we go back to 2005 when the oil price as about the same as it is today, Marathon was reporting quarterly profits, not losses.

In the first quarter of 2005, Marathon earned a positive $324 million in net income.  It also reported a $258 million net income gain in 2004, even at a much lower oil price of $38 a barrel versus the $48-$50 during Q3 2017.  So, the Falling EROI – Energy Returned On Invested is killing the profitability of shale oil and gas companies today, whereas they were making profits just a decade ago.

Now, I didn’t provide any data on the other shale oil fields in the U.S., but production continues to increase in several regions, especially in the Permian.  However, one of the largest players in the Permian, Pioneer Resources, isn’t making any money either.  If we look at their financials, we can see that Pioneer continues to spend more money on CAPEX than they are receiving from cash from operations:

In all three quarters in 2017, Pioneer spent more money on capital expenditures than it made from its operating activities.  Pioneer spent $400 million more on CAPEX spending than from its operations for the first nine months of 2017 ending on Sept 30th.  So, here is just another example of a U.S. shale oil producer who partly responsible for the rising production in the Permian, but it still isn’t making any money.

Now, some investors or readers on my blog would say that the situation will get better when the oil price continues towards $60, $70 and then $80 a barrel.  Well, that would be nice, but I believe we are heading towards one hell of a market crash.  Even though some economic indicators are looking rosy, this market is being propped up by a massive amount of debt and the largest SHORT VIX trade in history.  When the markets start to go south as the massive VIX TRADE reverses… well, watch out below.

Thus, as the markets crash, the oil price will head down with it.  Unfortunately, this will be the final blow to the U.S. Shale Oil Ponzi Scheme and with it… the notion of Energy Independence forever.



16 Comments on "Financial Carnage Continues To Gut Industry"

  1. makati1 on Wed, 15th Nov 2017 5:33 am 

    “Now, some investors or readers on my blog would say that the situation will get better when the oil price continues towards $60, $70 and then $80 a barrel. Well, that would be nice, but I believe we are heading towards one hell of a market crash. Even though some economic indicators are looking rosy, this market is being propped up by a massive amount of debt and the largest SHORT VIX trade in history. When the markets start to go south as the massive VIX TRADE reverses… well, watch out below.

    Thus, as the markets crash, the oil price will head down with it. Unfortunately, this will be the final blow to the U.S. Shale Oil Ponzi Scheme and with it… the notion of Energy Independence forever.”

    That says it all.

  2. Davy on Wed, 15th Nov 2017 6:24 am 

    It is likely we have demand destruction coming and it will be a blow to shale but likely not an end. Shale is too important to the current refinery complex and too important globally because of that. All you have to do is read some of Rocks comments or Nony.

    Demand destruction is likely coming once the economy turns over into general decline instead of the undulating plateau of malinvestment parading as growth we see currently. Growth and decline are occurring now but the decline is hidden with extend and pretend financial moral hazard. Energy is too important to just die and it won’t just die until the global economy has a significant bifurcation event. This event may be a process of events so this process may be slow. Since it is a process of events any one event could be a trigger.

    One thing we can say is it is “The Economy” stupid with oil and renewables. As long as the economy allows these sectors to grow they will. Currently there are darling industries. Our managed, repressed, and Ponzi scheming economy favors darling industries that government or financial centers promote. These don’t have to be productive because the current market makers manufacture fake productivity with financial drama. It is marketing like selling soap. Put a barely dressed woman in a shower is the kind of thing they are doing. Those not in favor and not acclimated to the exploitations of this new globalism are gutted.

    Normal price discovery and general accepted accounting principles are being adapted across the board. The rule of law is relative these days. This can go on for a while and is called financial rot. Sachzwang is present in our human financial ecosystem. Sachzwang is defined as a “factual constraint residing in the nature of things that leaves no choice but to perpetuate the existing conditions”. How long will this growth center hold? All economic powers are extended into disequilibrium from excessive debt and Ponzi arrangements. Markets across the board are elevated beyond fundamentals.

    This can’t last but normal logic does not work these days. A new logic of managed markets is in effect. This management is partly human nature. All liquidity is ultimately based on confidence. Fiat currencies are the best indicator of this. Yet, more in depth than the fiat currencies are the vast markets and trading systems of the global economy. It takes a very robust system to support this confidence. All these vast markets are interconnected too. Risk has been dispersed throughout the system. China is exposed to the US and the same is true for the US. Markets are subject to volatility constraints currently. Central banks are buying corporate paper to maintain markets.

    The problem with all this arrangement is rot and decay. Corruption of fundamentals and the whole price discovery process is a process that surely is going to lead to a negative event eventually. Corruption of fundamentals allows chaos to enter a system and once there it is a virus of disequilibrium. Oil and shale are wrapped up in this corrupted system. Oil no longer drives the financial world like it once did. This is seen lately by the decline of the petro dollar. Anti-American emotional types with little understanding of global economics love to bash the petrodollar but they are barking at the moon. Speculating on oil prices is no longer the same as it used to be. Speculating on anything these days has changed. Calling shale dead is speculating with yesterday’s fundamentals.

  3. Sissyfuss on Wed, 15th Nov 2017 9:46 am 

    It seems a better term for Shale Oil would be Snake Oil. But the US govt cannot afford to lose an industry that is providing life blood to our emaciated Ind Civ. Look for more Zirp, Tarp and Crap to keep up the illusion that growth continues and that being consumers is the highest life form attainable.

  4. rockman on Wed, 15th Nov 2017 2:43 pm 

    A constant (and often intentional IMHO) misrepresentation is that a company investing more capex in a particular year then it received in revenue implies the company has unprofitable production. Those two metrics are separate and have no bearing on how profitable (or unprofitable) past capex investments might have been. A company might have a net cash flow of $80 million in 2016 which represents a very respectable 15% ROR in the oil patch and yet spent $100 million in capex that year. The future ROR of the $100 million has no relationship to investments made before 2016. Likewise the future profitability of the $100 million investments will not be impacted the profit (or loss) represented by the $80 million made in 2016. As stated in my theoretical example it could be from previous profitable capex investments. Or might have been from money losing drill efforts. But in either case it has no bearing on profitability of the 2016 capex projects. That will be based solely upon the future cash flow from those projects.

    That seems to be stating the obvious but apparently not so to this writer.

    But have no doubt any companies drilled many wells that did not and won’t every return 100% of the capex invested. Just as true as when oil was $100/bbl or more recently at $45/bbl. But also understand that thousands of shale wells recovered 100%+ of their capex investments prior to the oil price collapse. That’s part of the bad/good news aspect of the high initial decline rates of the typical shale completion. The bad news: shale wells don’t represent long term revenue sources as conventional reservoirs can offer. But the good news: their revenue stream is “front loaded”. IOW they’ll recover a disproportionately large % of their revenue within the first two years or so.

    Which actually makes shale wells less vulnerable compared to a conventional reservoir to sudden decreases in the price of oil. Many of the shale wells recovered all of their investment with 18 to 24 months. After such wells have “paid out” it doesn’t matter if oil prices suddenly collapse: At that point they are and remain a profitable investment.

    But huge amounts of monies were lost. But for the most part it wasn’t the companies that got ultimately got “gutted” but investors and more specifically the money lenders…particularly bond holders. At least $85 BILLION in debt was eliminated thru Chapter 11 filings. But of the 200+ companies that filed bankruptcy I could find only one that was liquidated and ceased to exist. All the others came out of their bankruptcies is good shape. In fact some in much better financial condition then they have even experienced. Many folks, including some here, didn’t understand how federal bankruptcy laws were designed: not to punish companies but to eliminate past mistakes and make them viable operations that continue carrying business.

    Think about it: if all those companies were really losing money and were deep in the red why wouldn’t they fill Chapter 11, flush $BILLIONS in debt and start over again with much of their cash flow intact? Remember typically bondholders walk away with nothing while shareholders still own the company that’s once more is viable. But there are some cases where debt owners (typically the services companies that did the actual drilling) end up owning most if not all of the company with the original shareholders losing most if not all of their equity. But even in such situations: the company not only survives but also can get back to doing business. So even then the industry isn’t “gutted”…those shareholders are.

    Which might explain why you see companies that filed Chapter 11 still drilling shale wells: not only have they greatly reduced debt but typically have gotten new credit lines. One such company got a $600 million asset based credit line and is using it to drill in the Permian Basin. Assets that are now worth much more after $1.2 BILLION in debt was eliminated by its Chapter 11 filing.

  5. shortonoil on Wed, 15th Nov 2017 4:37 pm 

    “Which might explain why you see companies that filed Chapter 11 still drilling shale wells:”

    After Chapter 11 comes Liquidation. Shale is a sick industry held together with bailing twine, chewing gum, and a FED printing press. It is a net energy loser in an industry that sells energy? The US is putting all its eggs in one rickety basket. They came from a humming bird, and a desert lizard. It’s greatest con job since Eve sold Adam an apple!

  6. rockman on Wed, 15th Nov 2017 10:09 pm 

    shortonoil – “After Chapter 11 comes Liquidation.” And once ignorance bubbles to the surface. Ignorance that can be proven with a 10 second Internet search. As the link below CLEARLY explains Chapter 11 bankruptcy is a reorganization and restructuring of a company that is specifically designed to allow a company to continue doing business. Chapter 7 bankruptcy involves liquidating a company. Virtually all the dozens of stories reported involved Chapter 11 filings. As I said I found only one Chapter 7 filing. Given the info could be easily found by a 10 year old I can only assume that the statement that Chapter 11 involves liquidation is an intentional deceitful effort to confuse those to lazy to click the below link and take 60 SECONDS to read the FACTS.

  7. Keith McClary on Wed, 15th Nov 2017 11:20 pm 

    ROCKMAN: “Remember typically bondholders walk away with nothing while shareholders still own the company that’s once more is viable.”

    The all-knowing Wiki says:
    “If the business is insolvent, its debts exceed its assets and the business is unable to pay debts as they come due,[5] the bankruptcy restructuring may result in the company’s owners being left with nothing; instead, the owners’ rights and interests are ended and the company’s creditors are left with ownership of the newly reorganized company.”

    So you are correct, but it’s not the same shareholders who previously owned it. I guess that doesn’t matter to “the company” if that means the folks who work there.

  8. deadlykillerbeaz on Thu, 16th Nov 2017 4:23 am 

    Continental and EOG drill for oil. When they find some, they begin to pump it out and ship it. That is the plan from the get go.

    Oil is for sale because people use it. Demand creates the business. No demand for oil, no oil business. None, nada.

    Of course, there is demand for oil. Any 125 mile drive down I-95 will be the proof in the pudding. Driving is a major sport in America.

    Takes oil, a lot of it, hence, a major industry. All because kerosene was far less cost than whale oil.

    Leave those whales alone, oil from 100,000,000 year old whales is better.

    Pennzoil from Titusville is better than whale oil from the Atlantic. It’s a win win. Saves the whales, everybody can see at night. Everybody has work hauling oil to refineries.

    Oil rules the roost.

    Your car doesn’t need gas, you need gas.

    I suppose you can own a steam driven car and use coal.

    it ain’t the car, it’s the driver

    Without oil, the greenest energy source on the planet, your life would change and the change will include misery.

    No tv, no internet, it is game over.

    Nothing better than right now.

    Have a good day.

  9. rockman on Thu, 16th Nov 2017 10:41 am 

    Keith – That’s correct. When the debt owners take control of a company thru Chapter 11 that’s what happens. But more often DIP takes place:

    Debtor in possession (DIP) is an individual or corporation that has filed for Chapter 11 bankruptcy protection and remains in control of property that a creditor has a lien against, or retains the power to operate a business. A debtor who files a Chapter 11 bankruptcy case becomes the debtor in possession (DIP). The DIP continues to run the business and has the powers and obligation of a trustee to operate in the best interest of any creditors.

    A DIP can operate in the ordinary course of business, but is required to seek court approval for any actions that fall outside of the scope of regular business activities. The DIP must also keep precise financial records and file appropriate tax returns.

    After filing for Chapter 11 bankruptcy, new bank accounts are opened that name the debtor in possession on the account. A debtor in possession can be terminated and the court will appoint a trustee in the event that assets are improperly managed or the debtor in possession is not following court orders. The United States Trustee’s office maintains guidelines that specify the duties of a debtor in possession.

  10. CAM on Thu, 16th Nov 2017 12:55 pm 

    Once again the numbers don’t add. We produce some 9 mbd. Import a net of 3 mbd. Yet we use about 20 mbd. I really need an explanation!

  11. rockman on Thu, 16th Nov 2017 7:57 pm 

    CAM – Your numbers are still wrong. Here they are again:

    And again: pay attention to the categories.

  12. antaris on Fri, 17th Nov 2017 12:37 am 

    So chapter 11 makes it sound like the debt just disappears. Things are all good, nobody got screwed!

  13. rockman on Fri, 17th Nov 2017 10:38 am 

    antaris – Either you pay no attention to what’s been written or perhaps English is your second language. LOL. When debt is cancelled do you think the folks holding that debt don’t feel they got screwed? Either you’re that dense or intentionally playing dumb to pick a fight. In either case I think the group is tired seeing space wasted here correcting such foolishness. The Rockman certainly is.

    So you’re on your own. Good luck. LOL.

  14. rockman on Fri, 17th Nov 2017 10:55 am 

    Keith – A good example of what I was explaining is Halcon. Search “Halcon bankruptcy” if you want details. But here’s the essence: Chapter 11 eliminated $1.8 BILLION in debt and eliminated $300 million in interest the first year post bankruptcy. This allowed it to receive a brand new $600 million credit line it using to drill the new hot play in the Permian Basin.

    And of course no one got screwed, right antaris? Unless you count the Halcon shareholders. They had to give 96% of the company’s stock to the creditors. But the company still exists as DIP. But the DIP is run by the board of who were selected by the new owners…the former creditors.

    So Halcon, the company, came out of bankruptcy in fantastic shape. Better then many of its peers today. And if the new operations are successful those former creditors will earn much more then what they were owed. And the original shareholders: nearly screwed to death but did hang on to 4% of their former asset.

  15. antaris on Fri, 17th Nov 2017 2:25 pm 

    Rock, ever heard of a word “sarcasm” ?

  16. jh wyoming on Fri, 17th Nov 2017 6:33 pm 

    Shortonoil took one on the chin from Rockman – ouch!

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