Shakeout Threatens Shale Patch as Frackers Go for Broke
From an Article by A. Loder, Bloomberg News, May 27, 2014
Drillers must keep borrowing to pay for the exploration needed to offset the steep decline in the production from fracked shale gas wells.
The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.
Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.
“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”
Some investors are already bailing out. On May 23, Loews Corp., the holding company run by New York’s Tisch family, said it is weighing the sale of HighMount Exploration & Production LLC, its oil and natural gas subsidiary, at a loss.
HighMount lost $20 million in the first three months of the year, after being unprofitable in 2013 and 2012, Loews said it its financial reports. As with much of the industry, HighMount has shifted its focus to oil after natural gas prices plunged and has struggled to find sites worth developing, company records show.
In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter, according to company records compiled by Bloomberg on 61 exploration and production companies that target oil and natural gas trapped in deep underground layers of rock. And companies including Forest Oil Corp., Goodrich Petroleum Corp. and Quicksilver Resources Inc. racked up interest expense of more than 20 percent.
Production Declines
Quicksilver acknowledges the company is over-leveraged, said David Erdman, a spokesman for Quicksilver. The company’s interest expense equaled almost 45 percent of revenue in the first quarter. “We have taken concrete measures to reduce debt,” he said.
Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.
Interest Expenses
“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”
Chauhan wrote a report last year titled “The Other Tale of Shale” that showed interest expenses are gobbling up a growing share of revenue at 35 companies he studied. Interest expense for the 61 companies examined by Bloomberg totalled almost $2 billion in the first quarter, 4.1 percent of revenue, up from 2.3 percent four years ago.
The drilling spree boosted >U.S. oil production to 8.4 million barrels a day, 16 percent more than a year ago and the highest since 1986. Growth has been driven by advances in horizontal drilling and hydraulic fracturing, or fracking, which unlocked crude and natural gas trapped in formations like the Bakken shale or the Marcellus shale in the U.S. northeast.
Costly Gains
The gains haven’t come cheaply. Goodrich said earlier this month that it’s trying to whittle its well costs in the Tuscaloosa Marine Shale down to $11.5 million apiece. The $1.1 billion company, based in Houston, spent almost $52 million more than it earned in the first quarter.
The company has enough money to cover its 2014 capital needs and is working with its board to fund 2015 as it ramps up drilling. A successful well announced last month has propelled Goodrich shares to $25.34, more than double the 2014 low of $12.28.
While borrowing to spend is typical of start-up companies, it’s not always sustainable. Forest Oil, where interest expense totaled 27 percent of revenue in the first quarter, in February reported disappointing well results, and warned that it might run afoul of its debt agreements. Forest on May 6 announced a plan to sell itself to Sabine Oil & Gas LLC in an all-stock transaction. The company declined comment. Shares have declined 39 percent so far this year.
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Write-down of two-thirds of US shale oil explodes fracking myth
Industry’s over-inflated reserve estimates are unravelling, and with it the ‘American dream’ of oil independence
Next month, the US Energy Information Administration (EIA) will publish a new estimate of US shale deposits set to deal a death-blow to industry hype about a new golden era of US energy independence by fracking unconventional oil and gas.
EIA officials told the Los Angeles Times that previous estimates of recoverable oil in the Monterey shale reserves in California of about 15.4 billion barrels were vastly overstated. The revised estimate, they said, will slash this amount by 96% to a puny 600 million barrels of oil.
The Monterey formation, previously believed to contain more than double the amount of oil estimated at the Bakken shale in North Dakota, and five times larger than the Eagle Ford shale in South Texas, was slated to add up to 2.8 million jobs by 2020 and boost government tax revenues by $24.6 billion a year.
Industry lobbyists have for long highlighted the Monterey shale reserves as the big game-changer for US oil and gas production. Nick Grealy, who runs the consultancy No Hot Air which is funded by “gas and associated companies”, and includes the UK’s most high-profile shale gas fracker Cuadrilla among its clients, predicted last year that:
“… the star of the North American show is barely on most people’s radar screens. California shale will… reinvigorate the Golden State’s economy over the next two to three years.”
This sort of hype triggered “a speculation boom among oil companies” according to the LA Times.
Read more at http://www.theguardian.com/environment/earth-insight/2014/may/22/two-thirds-write-down-us-shale-oil-gas-explodes-fracking-myth