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US Shale Oil Industry: Catastrophic Failure Ahead

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While the U.S. Shale Industry produces a record amount of oil, it continues to be plagued by massive oil decline rates and debt.  Moreover, even as the companies brag about lowering the break-even cost to produce shale oil, the industry still spends more than it makes.  When we add up all the negative factors weighing down the shale oil industry, it should be no surprise that a catastrophic failure lies dead ahead.

Of course, most Americans have no idea that the U.S. Shale Oil Industry is nothing more than a Ponzi Scheme because of the mainstream media’s inability to report FACT from FICTION.  However, they don’t deserve all of the blame as the shale energy industry has done an excellent job hiding the financial distress from the public and investors by the use of highly technical jargon and BS.

For example, Pioneer published this in the recent Q2 2018 Press Release:

Pioneer placed 38 Version 3.0 wells on production during the second quarter of 2018. The Company also placed 29 wells on production during the second quarter of 2018 that utilized higher intensity completions compared to Version 3.0 wells. These are referred to as Version 3.0+ completions. Results from the 65 Version 3.0+ wells completed in 2017 and the first half of 2018 are outperforming production from nearby offset wells with less intense completions. Based on the success of the higher intensity completions to date, the Company is adding approximately 60 Version 3.0+ completions in the second half of 2018.

Now, the information Pioneer published above wasn’t all that technical, but it was full of BS.  Anytime the industry uses terms like “Version 3.0+ completions” to describe shale wells, this normally means the use of  “more technology” equals “more money.”  As the shale industry goes from 30 to 60 to 70 stage frack wells, this takes one hell of a lot more pipe, water, sand, fracking chemicals and of course, money.

However, the majority of investors and the public are clueless in regards to the staggering costs it takes to produce shale oil because they are enamored by the “wonders of technology.”  For some odd reason, they tend to overlook the simple premise that…


Of course, the shale industry doesn’t mind using MORE MONEY, especially if some other poor slob pays the bill.

Shale Oil Industry: Deep The Denial

According to a recently released article by 40-year oil industry veteran, Mike Shellman,  “Deep The Denial,” he provided some sobering statistics on the shale industry:

I recently put somebody very smart on the necessary research (SEC K’s, press releases regarding private equity to private producers, etc.) to determine what total upstream shale oil debt actually is. We found it to be between $285-$300B (billion), both public and private. Kallanish Energy Consultants recently wrote that there is $240B of long term E&P debt in the US maturing by 2023 and I think we should assume that at least 90 plus percent of that is associated with shale oil. That is maturing debt, not total debt.

… By year end 2019 I firmly believe the US LTO industry will then be paying over $20B annually in interest on long term debt.

Using its own self-touted “breakeven” oil price, the shale oil industry must then produce over 1.5 Million BOPD just to pay interest on that debt each year. Those are barrels of oil that cannot be used to deleverage debt, grow reserves, not even replace reserves that are declining at rates of 28% to 15% per year… that is just what it will take to service debt.

Using its own “breakeven” prices the US shale oil industry will ultimately have to produce 9G BO of oil, as much as it has already produced in 10 years…just to pay its total long term debt back.

Using Mike’s figures, I made the following chart below:

For the U.S. Shale Oil Industry just to pay back its debt, it must produce 9 billion barrels of oil. That is one heck of a lot of oil as the industry has produced about 10 billion barrels to date.  Again, as Mike states, it would take 9 billion barrels of shale oil to pay back its $285-300 billion of debt (based on the shale industry’s very own breakeven prices).

Furthermore, the shale industry may have to sell a quarter of its oil production (1.5 million barrels per day) just to service its debt by the end of 2019.  According to the EIA, the U.S. Energy Information Agency, total shale oil (tight oil) production is now 6.2 million barrels per day (mbd):

The majority of shale oil production comes from three fields and regions, the Eagle Ford (Blue), the Bakken (Yellow) and the Permian (light, medium & dark brown).  These three fields and regions produce 5.2 mbd of the total 6.2 mbd of shale production.

Unfortunately, the shale industry continues to struggle with mounting debt and negative free cash flow.  The EIA recently published this chart showing the cash from operations versus capital expenditures for 48 public domestic oil producers:

You will notice that capital expenditures (brown line) are still higher than cash from operations (blue line).  So, it doesn’t seem to matter if the oil price is over $100 (2013-2014) or less than $70 (2017-2018), the shale oil industry continues to spend more money than it’s making.  The shale energy companies have resorted to selling assets, issuing stock and increasing debt to supplement their inadequate cash flow to fund operations.

A perfect example of this in practice is Pioneer Resources… the number one shale oil producer in the mighty Permian.  While most companies increased their debt to fund operations, Pioneer decided to take advantage of its high stock price by raising money via share dilution.  Pioneer’s outstanding shares ballooned from 115 million shares in 2010 to 170 million by 2017.  From 2011 to 2016, Pioneer issued a staggering $5.4 billion in new stock:

So, as Pioneer issued over $5 billion in stock to produce unprofitable shale oil and gas, Continental Resources racked up more than $5 billion in debt during the same period.  These are both examples of “Ponzi Finance.”  Thus, the shale energy industry has been quite creative in hoodwinking both the shareholder and capital investor.

Now, there is no coincidence that I have focused my research on Pioneer and Continental Resources.  While Continental is the poster child of what’s horribly wrong with the shale oil industry in the Bakken, Pioneer is a role model for the same sort of insanity and delusional thinking taking place in the Permian.

Pioneer Spends A Lot More Money With Unsatisfactory Production Results

To be able to understand what is going on in the U.S. shale industry, you have to be clever enough to ignore the “Techno-jargon” in the press releases and read between the lines.  As mentioned above, Pioneer stated that it was going to add a lot more of its “high-tech” Version 3.0+ completion wells in the second half of 2018 because they were outperforming the older versions.

Well, I hope this is true because Pioneer’s first half 2018 production results in the Permian were quite disappointing compared to the previous period.  If we compare the increase of Pioneer’s shale oil production in the Permian versus its capital expenditures, something must be seriously wrong.

First, let’s look at a breakdown of Pioneer’s Permian energy production from their September 2018 Investor Presentation:

Pioneer’s Permian oil and gas production is broken down between its horizontal shale and vertical convention production.  I will only focus on its horizontal shale production as this is where the majority of their capital expenditures are taking place.  The highlighted yellow line shows Pioneer’s horizontal shale oil production in the Permian Basin.

You will notice that Pioneer’s shale oil production increased significantly in Q3 & Q4 2017 versus Q1 & Q2 2018.  Furthermore, Pioneer’s shale gas production surged in Q2 2018 by nearly 50% (highlighted with a red box) compared to oil production only increasing 5%.  That is a serious RED FLAG for natural gas production to jump that much in one quarter.

Secondly, by comparing the increase of Pioneer’s quarterly shale oil production in the Permian with its capital expenditures, the results are less than satisfactory:

The RED LINE shows the amount of capital expenditures spent each quarter while the OLIVE colored BARS represent the increase in Permian shale oil production.  To simplify the figures in this chart, I made the following graphic below:

Pioneer spent $1.36 billion in the second half of 2017 to increase its Permian shale oil production by 30,232 barrels per day (bopd) compared to $1.7 billion in the first half of 2018 which only resulted in an additional 10,832 bopd.  Folks, it seems as if something seriously went wrong for Pioneer in the Permian as the expenditure of $340 million more CAPEX resulted in two-thirds less the production growth versus the previous period.

Third, while Pioneer  (stock ticker PXD) proudly lists that they are one of the lowest cost shale producers in the industry, they still suffer from negative free cash flow:

As we can see, Pioneer lists their breakeven oil price at approximately $22, which is downright hilarious when they spent $132 million more on capital expenditures than the made in cash from operations:

The public and investors need to understand that “oil breakeven costs” do not include capital expenditures.   And according to Pioneer’s Q2 2018 Press Release, the company plans on spending $3.4 billion on capital expenditures in 2018.  The majority of the capital expenditures are spent on drilling and completing horizontal shale wells.

For example, Pioneer brought on 130 new wells in the first half of 2018 and spent $1.7 billion on CAPEX (capital expenditures) versus 125 wells and $1.36 billion in 2H 2017.  I have seen estimates that it cost approximately $9 million for Pioneer to drill a horizontal shale well in the Permian.  Thus, the 130 wells cost nearly $1.2 billion.

However, the interesting thing to take note is that Pioneer brought on 125 wells in 2H 2017 to add 30,000+ barrels of new oil production compared to 130 wells in 1H 2018 that only added 10,000+ barrels.  So, how can Pioneer add five more wells (130 vs. 125) in 1H 2018 to see its oil production increase a third of what it was in the previous period?  

Regardless, the U.S. shale oil industry continues to spend more money than they make from operations.  While energy companies may have enjoyed lower costs when the industry was gutted by super-low oil prices in 2015 and 2016, it seems as if inflation has made its way back into the shale patch.  Rising energy prices translate to higher costs for the shale energy industry.  Rinse and repeat.

Unfortunately, when the stock markets finally crack, so will energy and commodity prices.  Falling oil prices will cause severe damage to the Shale Industry as it struggles to stay afloat by selling assets, issuing stock and increasing debt to continue producing unprofitable oil.

I believe the U.S. Shale Oil Industry will suffer catastrophic failure from the impact of deflationary oil prices along with peaking production.  While U.S. Shale Oil production has increased exponentially over the past decade, it will likely come down even faster.

68 Comments on "US Shale Oil Industry: Catastrophic Failure Ahead"

  1. a-noise1 on Mon, 29th Oct 2018 2:33 pm 

    The exceptionalturd is laying on the shit extra thick today. You got nothing better to do with your life dumbass?

  2. Davy on Mon, 29th Oct 2018 3:04 pm 

    JuanPoossie, are you unable to take your panties off? Man up and face me one on one. How many socks have you generated…10? How much identity theft have you done? This has been daily now for weeks. It damages the board but you could give a shit. Why, because of that asshole South American playboy pride. This explains the multiple personality issues you have.

  3. rockman on Mon, 29th Oct 2018 4:13 pm 

    Once again, an article from someone who doesn’t even understand the basic nature of investments by the petroleum industry. In fact, probably about no industry. I’ll start with a very simple model that doesn’t exist but will be much easier to understand.

    Company A is brand new and has never drilled a well before. In Year 1 it spends $3 billion drilling shale wells. Some are great, some mediocre and some money losers that will never return a dollar of profit. But all produce some oil: very rarely do you hear of a shale well being a dry hole.

    So how many of the great wells produce a profit within 12 months after it was drilled? Typically none: very rarely does even a very profitable well recover 100% of its initial cost let alone any profit in 12 months. A well that can take 2 to 3 years just to recover 100% of its initial cost can yield an acceptable profit. If that FACT confuses you then stop reading now: you are beyond help.

    So in Year 2 Company A spends another $3 billion drilling shale wells with identical results as Y1. So what does its net revenue look like at the end of Y2? Some revenue from Y1 wells although none have turned a single dollar of profit yet. And Y2 wells? Even less cumulative net revenue then Y1 wells. IOW after spending $6 billion cumulatively no profit yet. But collectively both Y1 and Y2 wells will EVENTUALLY show a profit.

    But yearly a “snap shot” could look worse if oil prices are increasing and instead of $3 billion the company spends $4 billion in Y2. And remember Company A had ZERO REVENUE at the beginning of Y1 but had ZERO $ drilling shale wells at that same moment in time.

    Not getting the obvious point? If so just stop reading now…you no chance of understanding the real world I’m about to describe.

    Real world: Company A is not new and has been drilling wells (shale and others) for decades. Y1 production/revenue is from multiple years of drilling. And capex spent in Y1 will see revenue coming from many years in the future. Trying to judge a real company’s profitability based upon its revenue and spending in any one particular year is just foolish. And try to judge an entire industry? Simply insane.

  4. I AM THE MOB on Mon, 29th Oct 2018 4:49 pm 


    Enough with your long winded diatribe of jargon..You aren’t fooling anyone..And the fact that you have to shout in all capitals proves you are an unhinged low brow moron.

  5. JuanP on Mon, 29th Oct 2018 5:23 pm 

    MOB, Rockman knows more about oil than either of us combined. Give it a rest.

  6. Please kick the anti-american dog I made of granite forum on Mon, 29th Oct 2018 5:42 pm 

    rock is supertard and ^mm^ has a PhD in computational chemistry (very useless kind of degree). When I was pursuing my BA in Physics, I failed multivariable calculus because I used a graphing calculator. as a result, I couldn’t describe the shape of the equations/systems of equations come exam time and no calculators are allowed. i asked my professor just let me pass and she said no. very bad professor! SAD!

  7. JuanP on Mon, 29th Oct 2018 7:13 pm 

    Not me @ 5:23PM

  8. JuanP on Mon, 29th Oct 2018 10:55 pm 

    LOL! Neither one of the comments above were written by me! Someone else posted the first comment pretending to be me AND the second comment, again pretending to be me, and claiming the comment above was not mine. Interesting!

  9. Anonymouse1 on Mon, 29th Oct 2018 11:57 pm 

    Not really sure why you still have such a problem with people who either lie a lot, or have no idea what they are talking about. You are an oily-man, or ex-oilyman, or profess to be. An industry populated by people who either, lie through their teeth (PR-Spin-Propaganda Dept.) OR, they look for oil by sticking over-sized metal straws in the ground, using a methodology that amounts to little more than semi-educated guesswork.

    It is a good thing you are not allowed anywhere near any kind of ‘news’ or industry publications yourself narrativeman. I can well imagine what sort of feel-good, deflective horseshit would fly off your desk on a regular basis. In fact, if you look at your posting history, the biggest problem you have (always), is with anyone that posts factual accounts of the uS cancer cartels corruption and malfeasance. Or in the case of this particular article, or ones like it, the dodgy economics of uS oils end-game(s).

    Those always get the narrativeman’s thin, oily skin.

  10. Please kick the anti-american dog I made of granite forum on Mon, 29th Oct 2018 11:59 pm 

    guys some famous supertard once said you got to know powa or you will perish
    sis got direct line to uppertard so as long as you know where you are, you may be ok.

  11. Darrell Cloud on Tue, 30th Oct 2018 6:31 am 

    Civility has been lost.

  12. rockman on Tue, 30th Oct 2018 11:41 am 

    Juan – Curious about your opinion of my post. Always appreciate your opinions even if I see the matter differently. As far as the negative comments they are meaningless to me since they offer non alternative info. As such it would be a waste of space to respond.

  13. Please kick the anti-american dog I made of granite on Tue, 30th Oct 2018 12:23 pm 

    Supertard Juan is a tard so he does not understand you. Many people can’t understand normal speech. This explains all sort of misunderstanding and inefficiencies in life. Only supertards can communicate and function or act on communications 200%. Juan is trust fund baby of some corrupt dictator in south America and live on supertards accomplishments while pissing on it

  14. JuanP on Tue, 30th Oct 2018 1:25 pm 

    Rockman, you didn’t say that I said it for you. You never make a comment like that. I can’t help myself I am out of control and need medication.

  15. IanC on Tue, 30th Oct 2018 3:24 pm 

    How the mighty have fallen.
    This board sucks now…

  16. rockman on Wed, 31st Oct 2018 8:52 am 

    Ian – Unfortunately I have to agree with you…half the time. So many posts ignore factual aspects and are just a waste of space. My recommendation is just to remember those who typically have nothing meaningful to add and just don’t bother reading their posts. Just down the reading time considerably. LOL.

  17. Schop alsjeblieft de anti-Amerikaanse hond die ik van graniet heb on Wed, 31st Oct 2018 9:05 am 

    الرجال في يوم جيد آسيا بيبي مجاني ونعرف محمد تمتص ديكس ولكن جوجل يجري غبي ذمي

  18. Schop alsjeblieft de anti-Amerikaanse hond die ik van graniet heb on Wed, 31st Oct 2018 9:08 am 

    it’s good to see supertard here again and happy otherwise they insult you for no reason

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