U.S. Shale Has Lost $300 Billion In 15 Years
The U.S. shale industry peaked without ever making any money.
Over the past decade and a half, the slate industry has had a net negative cash flow of $ 300 billion, wrote off another $ 450 billion in invested capital, and has reported more than 190 bankruptcies since 2010, according to a new Deloitte report.
The U.S. shale industry has more than doubled oil production in the past half decade, which means a phenomenal increase in production. "However, the reality is that the slate boom has peaked without making any money for the industry," the consulting firm wrote in a scorching charge against the slate industry.
The financial problems that can arise with shale drilling have been known for some time, but the Covid 19 pandemic has blown the industry's growth path. Oil prices and a new reality are now leading to a "big compression" for slate.
A lot of ink has been spilled to think about what a world looks like after Covid. The IEA says demand will not return to pre-pandemic levels until at least 2022. Some analysts say the pandemic may have spiked oil spike demand by a few years, while others say spike demand may have already occurred.
The exact date is controversial, but most analysts, including Deloitte, say the Covid 19 pandemic is negative for oil in several ways. Fundamentals are affected - a huge increase in teleworking, supply chain disruptions and slower economic growth are putting pressure on oil demand.
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The fact that the financial markets have turned against them is particularly problematic for shale drills. This dynamic began to develop in late 2018 and throughout 2019. The recent downturn has intensified disillusion.
Deloitte estimates that the upcoming wave of depreciation could reach up to $ 300 billion. While some say these are “non-monetary” impairments (and therefore not as bad as they seem), Deloitte says the result will be an immediate increase in the industry's leverage ratio from 40 percent to 54 percent.
Even worse, at a time when fighting drills need more liquidity, access to capital is drying up. The latest periodic credit determination period brought bad news to companies in need of a new liquidity injection. According to Bloomberg and S & P Global Ratings, lenders cut the loan base this spring by an average of 23 percent. Two companies that were particularly badly hit were Chaparral Energy and Oasis Petroleum, whose credit lines were cut by 46 and 44 percent, respectively.
The combination of low oil prices, limited capital, high levels of debt and weak growth prospects could lead to another wave of bankruptcies. "You are on a large treadmill just to keep your production going and this treadmill is moving very quickly," Scott Sanderson, principal in Deloitte's Houston office, told the FT.
Approximately 30 percent of US slate operators are "technically insolvent," with WTI trading at $ 35 a barrel, the company estimated in its report. If oil fell to $ 20 a barrel, the proportion of insolvent companies would rise to 50 percent.
In the meantime, Bloomberg reported a toxic culture that permeates some shale companies. It is all too common for some slate managers to pressure their engineers to increase the value of their reserves to improve the company's valuation. It is important to note that executive compensation is often linked to the performance of stocks.
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"Interviews with five current and former engineers who spoke on condition of anonymity describe an ongoing culture that rewards happy conversations," wrote Rachel Adams-Heard in Bloomberg. "Two of the engineers say executives specifically told them to inflate reserves." The article provides other examples of punitive measures against engineers or contractors who make conservative reserve estimates.
Such a culture may or may not be typical of the industry as a whole, but it ultimately reflects the greater history of slate - promising that rapid growth, often based on debt, would at least ultimately bring wealth to the company and its shareholders. However, based on Deloitte's numbers - $ 300 billion in negative net cash flow for the industry since its inception - this narrative has emphatically fallen apart.
The next step is consolidation. Larger drills with stronger balances can accommodate some of the parts. However, not every slate company is needed in a world with persistently low oil prices and weak demand growth. According to Deloitte, only about 27 percent of slate companies would actually offer buyers added value. At least half of all slate companies are "superfluous".
By Nick Cunningham of Oilprice.com
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