U.S. Shale Oil Debt - Does *Refinancing* Mean Paying Down Debt or Adding New Debt?

[Tom Kirkman + 8,860]

So I've been waiting and waiting for this news to come out.  Due to higher oil prices, many U.S. Shale Oil companies are starting to refinance their debt from the last boom a few years ago.

My key question: ...

Will "refinancing debt" actually mean adding new debt, or actually paying off some of the old debt?

If "refinancing debt" for fracking means getting another shiny new credit card to make payments on old credit cards, then there will be one heckuva financial train wreck down the track.

If "refinancing debt" for fracking means restructuring to get lower interest rates so loans can be repaid faster, and debts actually reduced, then that is wonderful news.

Waiting to see how this plays out.

Higher Prices To Help Oil Companies Refinance $400B In Debt

Oil and gas companies that took a lot of loans and issued five- and seven-year notes in the “exuberance” years before 2014 are likely to get more favorable terms from lenders when they negotiate refinancing of debts worth a total of US$400 billion due by the end of 2019—because of the higher oil prices that boost their credit profiles.

According to data by Thomson Reuters LPC, the oil and gas sector has a combined US$833.3 billion of loans outstanding. Of those, US$399.5 billion is maturing by the end of next year, while US$138.4 billion is due by the end of this year.

[Rodent + 1,424]

1 hour ago, Tom Kirkman said:

So I've been waiting and waiting for this news to come out.  Due to higher oil prices, many U.S. Shale Oil companies are starting to refinance their debt from the last boom a few years ago.

My key question: ...

Will "refinancing debt" actually mean adding new debt, or actually paying off some of the old debt?

If "refinancing debt" for fracking means getting another shiny new credit card to make payments on old credit cards, then there will be one heckuva financial train wreck down the track.

If "refinancing debt" for fracking means restructuring to get lower interest rates so loans can be repaid faster, and debts actually reduced, then that is wonderful news.

If I was a betting man (and I'm not cuz I'm a woman) I'd place good money that we're talking about some creative financing that will include more debt. I have nothing to back up my rationale for my wager other than my usual cynacism and general disappointment in the human race. 

[Tom Kirkman + 8,860]

7 minutes ago, Rodent said:

If I was a betting man (and I'm not cuz I'm a woman) I'd place good money that we're talking about some creative financing that will include more debt. I have nothing to back up my rationale for my wager other than my usual cynacism and general disappointment in the human race. 

I tend to agree.  Hence my sneakily subversive question in bold, to gently nudge others to think about what "refinancing debt" will really mean.

[Mike Shellman + 548]

Thank you, Tom, and Ms. Rodent (I share your disappointment in the human shale oil industry, for sure); this is actually a very important topic to the future of hydrocarbons in the world. If I may, here is what I think: 

I like Thompson Rueters work and believe they are very thorough. Whatever portion of the $833 billion dollars of total debt (!!!)  mentioned is related to unconventional shale is enormous, more than perhaps I even imagined. What I do believe is that most of the nearly $400 billion that is within 2 years of maturity IS shale debt. The article implies that because of higher oil prices most of this debt will not face a great deal of scrutiny as it is rolled over and refinanced. I think that is the wrong conclusion. Interest rates WILL increase, by a minimum of six, 1/4 BP's in the next 2 years. That is going to hurt the shale oil industry's ability to refinance. Big time. And it will put the brakes on growth more than most realize. That aside, to refinance ones mortgage on ones home, the lender is always going to want a re-appraisal of the asset. We've all been through that very thing. Its business. For this shale debt refinancing to occur all of those vastly over stated reserve estimates, based on flawed decline curve analysis many years ago, will have to be audited, again, hopefully by independent, 3rd party reservoir engineers. When that happens most of the lenders are going to see they have been had. They are going to find themselves in the falling tide with their pants down around their knees and they are going to panic. Big time.  

A few of us that care about the deceit the shale industry is guilty of  have for many years implied that US shale oil reserves are overstated by a factor of two. If you doubt that, I suggest you should wander thru shaleprofile.com, or IHS, or DI data  and compare EUR's with UR's to date and you will see that we have all been lied to in a very, very big way. Art Berman recently said in a podcast with Chris Martensen that he questioned whether shale oil debt can now EVER be paid back. With great respect for Art I will go so far as to say it can NEVER be paid back now, not unless oil prices go to $90 dollars and stay there for a decade.

$400 plus billion dollars of debt is a shit pot of money. Think of it this way: at $62 gross oil the net back price after all costs are deducted, including royalty, taxes, G&A, interest expense and ever increasing lift costs is something in the order of $30-33 bucks a barrel in the 3 biggest shale basins. Divide that by $400B and it will take 12G BO of additional shale oil recovery just to pay back that debt. That is 3 1/2 billion MORE barrels of oil than the shale oil industry has  produced in the past decade. For all the hooey about the great shale oil revolution...it hasn't even been paid for yet. That scenario creates great risk for lenders willing to refinance (or with no option BUT to refinance) and contrary to what the article implies, the shale industry will pay, dearly, for kicking the debt can further down the road. 

 

 

 

 

  

Edited June 1, 2018 by Mike Shellman

[DanilKa + 443]

Tom, 

if that is where you going - definitely a possibility. 

On other hand, BoA sent out report suggesting net debt/ebitda of around 1.9x by YE for a group of 15 companies. Even this may be a challenge to repay in do-nothing case and 30% pa production decline. 

 

[Tom Kirkman + 8,860]

1 hour ago, DanilKa said:

Tom, 

if that is where you going - definitely a possibility. 

Thanks for that link from last year, DanilKa; I hadn't seen it before.

After reading Art Berman and Mike Shellman, I remain skeptical that debt will actually get paid down.

Relevant excerpt from the article you linked:

If we use some simple math, we can plainly see the U.S. oil industry will never be able to pay back the majority of its debt:

Shale Oil Production, Cost & Profit Estimates For 2018

REVENUE = 5 million barrels per day shale oil production x 365 days x $50 a barrel = $91 billion.

EST. PROFIT = 5 million barrels per day shale oil production x 365 days x $10 a barrel = $18 billion.

If these shale oil companies do actually produce 5 million barrels of oil per day in 2018, and were able to make a $10 profit (not likely), that would net them $18 billion.  However, according to the Bloomberg data, these companies would need to pay back $110 billion in debt (bonds) in 2018.  If they would use all their free cash flow profits to pay back this debt, they would still owe $92 billion.

Yes, it is true, I am not including all U.S. oil and gas production, but I am just trying to make a point here.  We must remember, this debt is below investment grade and is likely more of the shale oil and gas producers.  Furthermore, these shale oil and gas producers are using most of their free cash flow to drill more wells to produce more oil.  So, in all reality, they would not take most all of their profits or free cash flow to pay down debt.  They just wouldn’t have the funds to continue drilling.

[Dennis Coyne + 82]

12 hours ago, Mike Shellman said:

Thank you, Tom, and Ms. Rodent (I share your disappointment in the human shale oil industry, for sure); this is actually a very important topic to the future of hydrocarbons in the world. If I may, here is what I think: 

I like Thompson Rueters work and believe they are very thorough. Whatever portion of the $833 billion dollars of total debt (!!!)  mentioned is related to unconventional shale is enormous, more than perhaps I even imagined. What I do believe is that most of the nearly $400 billion that is within 2 years of maturity IS shale debt. The article implies that because of higher oil prices most of this debt will not face a great deal of scrutiny as it is rolled over and refinanced. I think that is the wrong conclusion. Interest rates WILL increase, by a minimum of six, 1/4 BP's in the next 2 years. That is going to hurt the shale oil industry's ability to refinance. Big time. And it will put the brakes on growth more than most realize. That aside, to refinance ones mortgage on ones home, the lender is always going to want a re-appraisal of the asset. We've all been through that very thing. Its business. For this shale debt refinancing to occur all of those vastly over stated reserve estimates, based on flawed decline curve analysis many years ago, will have to be audited, again, hopefully by independent, 3rd party reservoir engineers. When that happens most of the lenders are going to see they have been had. They are going to find themselves in the falling tide with their pants down around their knees and they are going to panic. Big time.  

A few of us that care about the deceit the shale industry is guilty of  have for many years implied that US shale oil reserves are overstated by a factor of two. If you doubt that, I suggest you should wander thru shaleprofile.com, or IHS, or DI data  and compare EUR's with UR's to date and you will see that we have all been lied to in a very, very big way. Art Berman recently said in a podcast with Chris Martensen that he questioned whether shale oil debt can now EVER be paid back. With great respect for Art I will go so far as to say it can NEVER be paid back now, not unless oil prices go to $90 dollars and stay there for a decade.

$400 plus billion dollars of debt is a shit pot of money. Think of it this way: at $62 gross oil the net back price after all costs are deducted, including royalty, taxes, G&A, interest expense and ever increasing lift costs is something in the order of $30-33 bucks a barrel in the 3 biggest shale basins. Divide that by $400B and it will take 12G BO of additional shale oil recovery just to pay back that debt. That is 3 1/2 billion MORE barrels of oil than the shale oil industry has  produced in the past decade. For all the hooey about the great shale oil revolution...it hasn't even been paid for yet. That scenario creates great risk for lenders willing to refinance (or with no option BUT to refinance) and contrary to what the article implies, the shale industry will pay, dearly, for kicking the debt can further down the road.  

Hi Mike,

Do you think OPEC and other producers in the World are likely to be able to bring on 800 kb/d of new production capacity each year, over and above the decline of existing production for the foreseeable future  (note that an annual increase in World C+C output of 800 kb/d has been the linear trend from 1982 to 2017, which may or may not continue.)  Decline at 4% per year is about 3200 kb/d plus 800 kb/d gives us about 4000 kb/d of new output needed each year to match an 800 kb/d increase in World C+C consumption.  I think it will be a struggle to accomplish this and oil supply will be tight.

My guess is that the answer is no, at least after 2020.  If I am correct, oil prices are likely to rise and your assumption of $62/b gross oil will be incorrect after 2020, and probably $90/b is a better guess.

Also according to the Wall St Journal, shale (LTO) oil debt is about $260B as of the end of 2017.  So we get about $60/b net back and about 260B/60=4.33 Gb of oil produced after 2020.  Proved reserves for US LTO at the end of 2016 were 15 Gb, an optimistic scenario would have about 9 Gb of US LTO output from Dec 2016 to Dec 2020, leaving 6 Gb to pay off the debt.

I have adjusted my well cost in my scenarios to $9.5 million for Permian and Bakken/TF and $7.5 M for Eagle Ford and under the simple oil price scenario shown (right hand axis).  Note the scenario is probably too optimistic and clearly oil prices will be more volatile than this scenario, but the future prices and the precise path over time is unknown.  This is a what if scenario as in if prices were as shown, the wells drilled would be profitable under the assumptions of the scenario.

Note that EIA estimates 5557 kb/d of US LTO output for April 2018.  Also if Tom's $65/b long term oil price estimate is correct, US LTO output is likely to be much lower than this scenario, but I don't think Tom's estimate is correct.

Edited June 1, 2018 by Dennis Coyne

[Mike Shellman + 548]

Dennis, I have followed your models and oil price predictions for years. I do not wish to engage with you about that anymore; feel free to consider me wrong about oil prices, apparently along with everyone else. Whatever you think Russia and OPEC should do, or will do, they will continue to influence world oil markets for reasons none of us, including you, can even imagine. Unlike the US, badly brainwashed by shale oil abundance crap, other oil producing countries in the world manage their sovereign resource wealth for the long term. America is on a mission to deplete its remaining resources as fast as it can, for cheap exports to Asia, high CEO compensations, and ego-driven foreign policies.

The WSJ implies public shale oil debt is something over $260B. My research suggests that is about right but what we don't know is what private shale debt is, not reported to the public, and midstream debt also owned by upstream E&P's. Thompson Reuters is a pretty good outfit, lets stay with $400B, since I was addressing the Reuters article, not the WSJ's article, quit worrying so much about what might happen 3-4 years from now and use 2018 oil prices. $400G/$32=12.5G BO. That seems way more realistic to me than guessing about what prices might be in 3-4 years. Regardless, its a big number required just to get back to even. 

You should have a beer this evening, whack $60 off your wild ass oil price projections and re-run your model. You will probably then feel the need to have many more beers.

 

 

 

 

 

[Rodent + 1,424]

So with regards to the significant debt that everyone I think is in agreement that US shale drillers have strapped on in recent years, what does that really mean, productionwise? Does it really mean anything, knowing today's current financial climate? Borrow, borrow, borrow, and when you can no longer borrow, file for bankruptcy and then borrow some more. Isn't that today's solution? God forbid we let any unproductive producers wither and die.

From 2015 to mid-2017, 123 US producers filed for bankruptcy, involving 79.9 billion in debt. 8 out of 10 largest US exploration and production companies that had filed for Chap 11 managed to restructure and carry on.

 

[Jan van Eck + 7,558]

19 minutes ago, Rodent said:

 

From 2015 to mid-2017, 123 US producers filed for bankruptcy, involving 79.9 billion in debt. 8 out of 10 largest US exploration and production companies that had filed for Chap 11 managed to restructure and carry on.

 

Of course they do  ("restructure and carry on").  That is the whole idea behind Chapter 11. 

Looming over the creditors and equity holders is an even worse scenario:  where the assets of the corporation are sold in bulk to a bidder, a process known as "Section 363."   In a 363 sale, the equity holders receive zero.  In a re-structure, some of the secured debt is converted to equity, and the equity holders suffer dilution  (but still have a toe in the game).  And the unsecureds even get a few pennies, possibly as low as two cents, just to assure their votes to the Chapter 11 Plan.  So the impetus is for a restructured company, not a liquidation via asset sale. 

Once restructured, now the balance sheet is cleaned up, and yup, they go out and take on more debt!  Welcome to America.