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Fracking in 2018: Another Year of Pretending to Make Money

Business

2018 was the year the oil and gas industry promised that its darling, the shale fracking revolution, would stop focusing on endless production and instead turn a profit for its investors. But as the year winds to a close, it’s clear that hasn’t happened.

Instead, the fracking industry has helped set new records for U.S. oil production while continuing to lose huge amounts of money — and that was before the recent crash in oil prices.

But plenty of people in the industry and media make it sound like a much different, and more profitable, story.

Broken Promises and Record Production

Going into this year, the fracking industry needed to prove it was a good investment (and not just for its CEOs, who are garnering massive paychecks).

In January, The Wall Street Journal touted the prospect of frackers finally making “real money … for the first time” this year. “Shale drillers are heeding growing calls from investors who have chastened the companies for pumping ever more oil and gas even as they incur losses doing so,” oil and energy reporter Bradley Olson wrote.

Olson’s story quoted an energy asset manager making the (always) ill-fated prediction about the oil and gas industry that this time will be different.

“Is this time going to be different? I think yes, a little bit,” said energy asset manager Will Riley. “Companies will look to increase growth a little, but at a more moderate pace.”

Despite this early optimism, Bloomberg noted in February that even the Permian Basin — “America’s hottest oilfield” — faced “hidden pitfalls” that could “hamstring” the industry.

They were right. Those pitfalls turned out to be the ugly reality of the fracking industry’s finances.

And this time was not different.

On the edge of the Permian in New Mexico, The Albuquerque Journal reported the industry is “on pace this year to leap past last year’s record oil production,” according to Ryan Flynn, executive director of the New Mexico Oil and Gas Association. And yet that oil has at times been discounted as much as $20 a barrel compared to world oil prices because New Mexico doesn’t have the infrastructure to move all of it.

Who would be foolish enough to produce more oil than the existing infrastructure could handle in a year when the industry promised restraint and a focus on profits? New Mexico, for one. And North Dakota. And Texas.

In North Dakota, record oil production resulted in discounts of $15 per barrel and above due to infrastructure constraints.

Texas is experiencing a similar story. Oilprice.com cites a Goldman Sachs prediction of discounts “around $19-$22 per [barrel]” for the fourth quarter of 2018 and through the first three quarters of next year.

Oil producers in fracking fields across the country seem to have resisted the urge to reign in production and instead produced record volumes of oil in 2018. In the process — much like the tar sands industry in Canada — they have created a situation where the market devalues their oil. Unsurprisingly, this is not a recipe for profits.

Shale Oil Industry ‘More Profitable Than Ever’ — Or Is It?

However, Reuters recently analyzed 32 fracking companies and declared that “U.S. shale firms are more profitable than ever after a strong third quarter.” How is this possible?

Reading a bit further reveals what Reuters considers “profits.”

“The group’s cash flow deficit has narrowed to $945 million as U.S. benchmark crude hit $70 a barrel and production soared,” reported Reuters.

So, “more profitable than ever” means that those 32 companies are running a deficit of nearly $1 billion. That does not meet the accepted definition of profit.

separate analysis released earlier this month by the Institute for Energy Economics and Financial Analysis and The Sightline Institute also reviewed 32 companies in the fracking industry and reached the same conclusion: “The 32 mid-size U.S. exploration companies included in this review reported nearly $1 billion in negative cash flows through September.”

The numbers don’t lie. Despite the highest oil prices in years and record amounts of oil production, the fracking industry continued to spend more than it made in 2018. And somehow, smaller industry losses can still be interpreted as being “more profitable than ever.”

The Fracking Industry’s Fuzzy Math

One practice the fracking industry uses to obfuscate its long money-losing streak is to change the goal posts for what it means to be profitable. The Wall Street Journal recently highlighted this practice, writing: “Claims of low ‘break-even’ prices for shale drilling hardly square with frackers’ bottom lines.”

The industry likes to talk about low “break-even” numbers and how individual wells are profitable — but somehow the companies themselves keep losing money. This can lead to statements like this one from Chris Duncan, an energy analyst at Brandes Investment Partners:

“You always scratch your head as to how they can have these well economics that can have double-digit returns on investment, but it never flows through to the total company return.”

Head-scratching, indeed.

The explanation is pretty simple: Shale companies are not counting many of their operating expenses in the “break-even” calculations. Convenient for them, but highly misleading about the economics of fracking because factoring in the costs of running one of these companies often leads those so-called profits from the black and into the red.

The Wall Street Journal explains the flaw in the fracking industry’s questionable break-even claims: “break-evens generally exclude such key costs as land, overhead and even at times transportation.”

Other tricks, The Wall Street Journal notes, include companies only claiming the break-even prices of their most profitable land (known in the industry as “sweet spots”) or using artificially low costs for drilling contractors and oil service companies.

While the mystery of fracking industry finances appears to be solved, the mystery of why oil companies are allowed to make such misleading claims remains.

Wall Street Continues to Fund an Unsustainable Business Model

Why does the fracking industry continue to receive more investments from Wall Street despite breaking its “promises” this year?

Because that is how Wall Street makes money. Whether fracking companies are profitable or not doesn’t really matter to Wall Street executives who are getting rich making the loans that the fracking industry struggles to repay.

An excellent example of this is the risk that rising interest rates pose to the fracking industry. Even shale companies that have made profits occasionally have done so while also amassing large debts. As interest rates rise, those companies will have to borrow at higher rates, which increases operating costs and decreases the likelihood that shale companies losing cash will ever pay back that debt.

Continental Resources, one of the largest fracking companies, is often touted as an excellent investment. Investor’s Business Daily recently noted that “[w]ithin the Oil & Gas-U.S. Exploration & Production industry, Continental is the fourth-ranked stock with a strong 98 out of a highest-possible 99 [Investor’s Business Daily] Composite Rating.”

And yet when Simply Wall St. analyzed the company’s ability to pay back its over $6 billion in debt, the stockmarket news site concluded that Continental isn’t well positioned to repay that debt. However, it noted “[t]he sheer size of Continental Resources means it is unlikely to default or announce bankruptcy anytime soon.” For frackers, being at the top of the industry apparently means being too big to fail.

As interest rates rise, common sense might suggest that Wall Street would rein in its lending to shale companies. But when has common sense applied to Wall Street?

Even the Houston Chronicle, a major paper near the center of the fracking boom, recently asked, “How long can the fracking spending spree last?”

So, is the party over?

Not according to Katherine Spector, a research scholar at Columbia University’s Center on Global Energy Policy. She explains how Wall Street will reconcile investing in these fracking firms during a period of higher interest rates: “Banks are going to make more money [through higher interest rates], so they’re going to want to get more money out the door.”

DeSmog Blog



127 Comments on "Fracking in 2018: Another Year of Pretending to Make Money"

  1. Cloggie on Fri, 18th Jan 2019 2:46 pm 

    Why not try clicking your heels together three times like Dorothy in the Wizard of Oz and ask for a civil war. Then you could attribute that as additional evidence.

    https://peakoil.com/enviroment/overpopulation-and-its-effects

    Davy-

    On the bright side, you’re located exactly where you belong.

    If climate change does not get you first, then for sure your “neighbors” will.

    Enjoy.

    Don’t tell me that you went to Colombia just to hug trees, right?

    Social collapse is very well at the back of your mind too.

  2. Cloggie on Fri, 18th Jan 2019 2:49 pm 

    Many Russians during the war saw Germans as liberators from an unbearable (and US-supported) regime:

    https://www.youtube.com/watch?v=tg6mukX9EsQ

    http://www.ihr.org/other/kirilovflightfromhell

  3. Boat on Fri, 18th Jan 2019 2:57 pm 

    I forget to mention, we are in 2019, and I am still a compete retard. I hope the scientist robots at google labs can make cure for riturdation soon. All retirded people are special even me. Please find cure fast.

  4. Cloggie on Fri, 18th Jan 2019 3:06 pm 

    Solar and wind energy have very low eroei and without government subsidies wouldn’t exist at a large scale my prediction is around 2020 to 2023 the world economy will implode taking down all the solar and wind farms with it as they are far too energy intensive

  5. I AM THE MOB on Fri, 18th Jan 2019 3:10 pm 

    Clogg

    I’m at the bar and I just met a young cute lady..and she is wearing no panties she told me..sucks to be a Nazi like you..lol

  6. Cloggie on Fri, 18th Jan 2019 3:19 pm 

    “I’m at the bar and I just met a young cute lady”

    Already agreed upon the price?

  7. Cloggie on Fri, 18th Jan 2019 4:53 pm 

    Btw you don’t want to be living anywhere around a 500mile radius from a nuclear power station after 2023
    Which is all of the Netherlands and many parts of Europe unless you like glowing at night

  8. I AM THE MOB on Fri, 18th Jan 2019 4:54 pm 

    Clogg

    He thinks because he has a bunch of MSM articles it proves it..No science studies..so stupid…just wait till the oil shortage hits..He will kill himself..which will raise the global IQ.

  9. I AM THE MOB on Fri, 18th Jan 2019 4:56 pm 

    Clogg

    I still have a girlfriend as well…This is just a side chick..How does it feel to be impotent like Hitler? Marx had 7 kids and fucked like a rabbit.

    LOL

  10. Cloggie on Fri, 18th Jan 2019 5:06 pm 

    My Msn sources tell me that wind farms only produce a pitiful 4% of the electricity in the nederlands after all the billions thrown at it . Nice investment. NOT!

  11. Cloggie on Fri, 18th Jan 2019 5:09 pm 

    “I still have a girlfriend as well…This is just a side chick..How does it feel to be impotent like Hitler? Marx had 7 kids and fucked like a rabbit.”

    More likely you are jerking yourself off at black-on-jew gay sex.

    Anonymous posters who post pictures of their alleged girlfriends, don’t have any. Go fool your mother.

  12. Antius on Fri, 18th Jan 2019 5:27 pm 

    “I still have a girlfriend as well…This is just a side chick..How does it feel to be impotent like Hitler? Marx had 7 kids and fucked like a rabbit”

    Wonder what she thinks about you apparently spending every waking hour pissing about on the internet? Maybe someone else is keeping her company?

  13. I AM THE MOB on Fri, 18th Jan 2019 5:42 pm 

    Clogg

    There was zero girls at your nazi march in Virgina..Just like Hitler they are a bunch of angry incels taking their problems out on someone else..True cowards..And the left has all the gangs and guns on our side..You have the cowardly church people..LOL

  14. makati1 on Fri, 18th Jan 2019 5:47 pm 

    Antius, his fantasy is just expanding. He has no life. Mom won’t pay for it and his druggie bitch is broke. He wants us to believe he has a life, nothing more.

    Any intelligent young person would not be on the internet (PO) 24/7/365 like he is, if they really had something interesting and useful to do, or real friends. A loser snowflake. Nothing more.

    By my mid thirties, I had a family and a job with a major engineering firm in their design and drafting department, making a good wage. I would be ashamed to be what he is in the prime of his life. A zero.

  15. I AM THE MOB on Fri, 18th Jan 2019 6:24 pm 

    Mak

    Remember when you said China’s has one of the worlds lowest debts because you didn’t know how to properly calculate it? You are as dumb as rocks..put down the keyboard gramps you aint getting smarter with age.

  16. Cloggie on Fri, 18th Jan 2019 6:29 pm 

    The only wind power that has a positive eroei is in a can of beans. Lol

  17. I AM THE MOB on Fri, 18th Jan 2019 6:33 pm 

    Mak

    You are so jealous because your wife left you and you are an old impotent geezer..I doubt you can even get a chubby if you wanted to..

    LOL

  18. makati1 on Fri, 18th Jan 2019 6:38 pm 

    MOB, the “your wife left you” lie is never going to be true, no matter how many times you repeat it. You have no life. You are too stupid to ever have a life. Your arrogance will never let you have a girlfriend for very long. Face it. All of your claims here are pure bullshit. A college degree? LMAO!

  19. makati1 on Fri, 18th Jan 2019 6:46 pm 

    BTW MOB, what’s the weather like there in the Rust Belt? Below freezing? Snow and ice this weekend? Awww!

    It is a beautiful Saturday morning here. The sun is shining and it is 80 degrees, going up to about 84 later. Typical day here in the land of eternal summer. LOL

  20. I AM THE MOB on Fri, 18th Jan 2019 7:06 pm 

    This “Daily Mail” front page was printed two years ago, and has expired faster than its “Hurrah for the Blackshirts!” one.

    http://cubmagazine.co.uk/wp-content/uploads/2017/01/Theresa-Daily-Mail.jpg

  21. makati1 on Fri, 18th Jan 2019 7:38 pm 

    Frustrated MOB? No smart-ass rebuttal? Why? Because you have none? All you can do is put down anyone who points out the truth, just like Davy. Are you a Davy clone?

    The US is going down and the sooner the better for the rest of the world. You know, those 7,300,000,000 other people who inhabit this planet. The terrorist country has to die for the rest of the world to move forward.

  22. twocats on Fri, 18th Jan 2019 8:55 pm 

    China just dumped in a cool trillion into the global liquidity slush fund. lose as much money as you need shale oil – won’t make a lick of difference. well – 1.16 trillion yuan anyway which is only 171 billion USD, so kind of a yawner. but will still pump a shit-ton of shale oil at a loss.

  23. Cloggie on Fri, 18th Jan 2019 10:08 pm 

    Ev’s are absolutely rubbish and use a crap load of fossil fuels in the production running and maintainence during there often short lifespan.
    The only true renewable energy is firewood .

  24. Cloggie on Fri, 18th Jan 2019 10:59 pm 

    The only wind energy that had a positive eroei were the old timber hand built windmills from the past theses concrete and steal behemoths they build now days will never give back all the energy that goes into there production and maintenance and eventual demolition in there lifespan

  25. makati1 on Sat, 19th Jan 2019 1:10 am 

    I’m glad I am no longer a tax slave to the Congressional mafia. They just proved my point that any numbers coming out of the government are lies.

    “From this point forward,” he says, “the federal government will keep two sets of books, one modified book for the public and one true book that is hidden….

    One thing is certain: the taxpayer who opens up a federal financial statement expecting to find correct numbers will no longer be sure of what he or she is reading.”

    https://www.rollingstone.com/politics/politics-features/secret-government-spending-779959/

    Before you poopoo the source, read:

    http://files.fasab.gov/pdffiles/handbook_sffas_56.pdf

    I pay zero taxes to the empire except sales tax when I visit and buy something. I sleep with a clean conscious as I am not supporting those international terrorists. Slip slidin’…

  26. Cloggie on Sat, 19th Jan 2019 1:13 am 

    “There was zero girls at your nazi march in Virgina.”

    There were zero girls present during all humanities wars either. Your point?

    https://youtu.be/rrm_JAnVKzI

    Interesting thing about these tourch bearers: they are fed up with the prospect of third world USA and they begin to call themselves Europeans and want a separate white ethno state on US soil. On top of that, they are very aware of the JQ.

    [insert vile Yuropean natzi grin here]

    These people will come into action after the Chinese will have slaughtered a couple of tens of thousand Amis in Taiwan, Philippines and South-China Sea. Faced with the prospect of a certain death in East-Asia on behalf of a hated ZOG-regime, they might as well rebel at home and shoot a few Fed recruiters and sheriffs and start a country of their own. ZOG of course will fight back, but here is where PBM will come in: based on an XXL-Zimmermann-2.0 agreement between Mexico and PBM…

    https://en.wikipedia.org/wiki/Zimmermann_Telegram

    …encompassing that Mexico will get SW-USA back (Rockies,1820 borders), PBM can pump endless amounts of weapons into the hands of said rebels via Mexico.

    This should lead to a white ethno-state, strongly allied to PBM, coinciding with the fertile planes of the Missisipi river basin:

    https://en.wikipedia.org/wiki/Mississippi_River#/media/File:Mississippiriver-new-01.png

    Post-Brexit Britain can administer Anglo-Canada (and Down-Under), Quebec will return to the loving care of France.

    Specialized German troops will demolish all the ZOG-buildings like Capitol Hill, White House, Pentagon, Fed, etc, forcing Americans to reinvent themselves.

    Folks like George Soros will be carted off to Nuremberg, get a fair trail and a decent hanging.

    End good, all good.

    Questions, mobster?

  27. Davy on Sat, 19th Jan 2019 5:40 am 

    “I pay zero taxes to the empire except sales tax when I visit and buy something. I sleep with a clean conscious as I am not supporting those international terrorists. Slip slidin’…”

    give me a break makattoo, first you don’t make enough to matter living on a small social security payment and second taxes are part of life. Spare me the drama of sleeping with a clear conscience.

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