Marina Schwarz

US E&P Defaults Continue Despite Price Rise

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"Defaults are still occurring in the U.S. energy industry despite higher oil prices, Fitch Ratings said this week, pointing specifically at exploration and production companies.

In August 2016, the distress rate peaked with a 32.1% default rate for E&P companies. In January 2017 the default rate hit 19.7% for energy overall, Kallanish Energy finds.

“Lingering dislocations from shale and the lagged cleanup of capital structures is resulting in continued distressed debt exchanges (DDE) and Chapter 22 filings for speculative-grade E&P firms,” Fitch said."

Isn't that normal? I mean, lots of companies, some are bound to be unable to survive.

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Thanks, Tom.  I, of course, don't consider anything "normal" about failure and bankruptcy in the E&P business because its occurrence is a direct result of breaking the No. 1 fundamental rule in oil exploration and production...DO NOT BORROW MONEY TO DRILL OIL OR GAS WELLS. IF YOU MUST, PAY IT BACK AS SOON AS IS HUMANLY POSSILBE, AT ALL COSTS! The American shale oil phenomena did not get that memo.

Here is another little dirty secret about this mess: it is clear to me and others that the shale oil industry has grossly over exaggerated its reserves, its assets. In my opinion, for 90% of the shale oil companies working in the US, the liquidated, discounted value of their  assets would NOT cover their debt. They are then, by every definition of the word, insolvent. If one looks at their debt to asset ratios based on reported reserves, not real, discounted reserves, most of US shale oil companies have Moody's ratings, or credit scores, in the 500's. In other words, they would have to get their mothers to co-sign a note for them to buy a new pickup truck.

Higher prices and higher well productivity is not helping much. Debt maturities are looming, interest rates are going up...they'll be lots more shale oil companies walking the check very soon.




Edited by Mike Shellman
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It disturbs me, but leveraging, with bankruptcy as the known likely outcome, is a business model intentionally sought out. The POTUS himself embraced the model for years. As long as the marginal cost of production is positive, there is an argument than bankruptcy is a good thing, pruning the tree so to speak. In a world where futures, derivatives,  and speculation seem to drive pricing, at least in the near term, more than basics of cost, it seems to me bankruptcies are inevitable. And lot's of bankruptcies.

In a finance driven world, where huge monies are made in the deal, and not the execution of a business over time, the likelihood of business models with bad results for the run of the mill lender and stockholder are higher, much higher. The systems produces what is rewarded.

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