WSJ *still* refuses to acknowledge U.S. Shale Oil industry's horrible economics and debts

Sometimes I just want to dump a bucket of cold water on the rhetorical head of Wall Street Journal writers who obstinately refuse to report on the fact that overall, the U.S. Shale Oil industry has so far been a money losing scheme.

I'm very much pro-Oil & Gas.  But my issue with U.S. Shale Oil industry is that so far, for the most part, it is a debt scheme, financed by next-to-zero-interest "free money" loans, and the industry burns more cash than it gets.  Kinda like Tesla.  So in this thread I'll be kinda like a grumpy Tesla shareholder after Elon says he lost more money but everything is great....

Here's the Wall Street Journal link - you probably will get a paywall if you click on the link here.  Easy enough to bypass the paywall, just copy & paste a sentence from the article into Google (not Google News) and WSJ will normally allow access past their paywall.

Frackers Burn Cash to Sustain U.S. Oil Boom

"American oil companies—primed to reap the benefits of rising prices after years of wringing more from wells for less—are seeing profits erode in the face of rising costs."

==============================

Profits ???  Profits erode ???  Yeah, more on that in a minute...

==============================

"Those operational challenges make balancing lofty growth objectives and demands for fiscal restraint increasingly difficult. If the companies continue to stumble, the result could be a higher cost of capital to finance the ongoing U.S. energy boom or a slower pace of growth.

Two-thirds of U.S. oil producers failed to live within their means in the second quarter, even as oil rose above $70 a barrel. Collectively, 50 major U.S. oil companies reported in their second-quarter results that they have spent $2 billion more than they took in, according to an analysis of free cash flow by FactSet."

==============================

Ok, after that miscue in their opening sentence about "profits eroding" WSJ admits that "seeing profits erode" is actually a $2 billion loss.  Not quite the same as profits reducing is it?

With what I just mentioned now, please feel free to read the entire WSJ article, realizing that WSJ euphemism of "profits eroding" is in reality a cash burn and cash loss.

For comparison, here's an Oil Price article from 6 months ago:

Why Is The Shale Industry Still Not Profitable?

Echoing the criticism of too much hype surrounding U.S. shale from the Saudi oil minister last week, a new report finds that shale drilling is still largely not profitable. Not only that, but costs are on the rise and drillers are pursuing “irrational production.”

Riyadh-based Al Rajhi Capital dug into the financials of a long list of U.S. shale companies, and found that “despite rising prices most firms under our study are still in losses with no signs of improvement.” The average return on asset for U.S. shale companies “is still a measly 0.8 percent,” the financial services company wrote in its report.

Moreover, the widely-publicized efficiency gains could be overstated, at least according to Al Rajhi Capital. The firm said that in the third quarter of 2017, the “average operating cost per barrel has broadly remained the same without any efficiency gains.” Not only that, but the cost of producing a barrel of oil, after factoring in the cost of spending and higher debt levels, has actually been rising quite a bit.

Shale companies often tout their rock-bottom breakeven prices, and they often use a narrowly defined metric that only includes the cost of drilling and production, leaving out all other costs. But because there are a lot of other expenses, only focusing on operating costs can be a bit misleading.

The Al Rajhi Capital report concludes that operating costs have indeed edged down over the past several years. However, a broader measure of the “cash required per barrel,” which includes other costs such as depreciation, interest expense, tax expense, and spending on drilling and exploration, reveals a more damning picture. Al Rajhi finds that this “cash required per barrel” metric has been rising for several consecutive quarters, hitting an average $64 per barrel in the third quarter of 2017. That was a period of time in which WTI traded much lower, which essentially means that the average shale player was not profitable.

 

==============================

And I will shamelessly quote one of my own comments from May:

Difficult to say what the actual break even price for U.S. Shale oil is.  The decline rates average around 80% decline in 3 years.

I would hazard a guess that the actual break even price would be around $80 or so.  Don't shoot me, let me explain...

Forbes, Bloomberg, MSM tend to ignore the elephant in the room of the massive debt that financed the U.S. Shale oil boom. Still mostly unpaid, and still racking up interest due.

$293 billion of debt just in bonds. Let alone all of the bank loans.  Easily half a Trillion dollars of debt - that is what bankrolled the U.S. Shale revolution.

Most MSM, when they discuss breakeven prices, neglect to include the massive amounts of debt into their calculations.

And the MSM tends to throw out a red herring of "technology advances" that "drove down" the break even costs.

The bulk of these so-called "technology advances" in the U.S. fracing industry is simply squeezing down to virtually no profits, the producer's costs for manpower rates, costs for equipment, costs for Service Companies.

As the price of oil recovers, the manpower that got bled dry by super low day rates, the Service Companies that survived on pretty much no profits for the past few years, the equipment renters who have been idle since 2015 ....  all of these rates will go up, as there services are coming back into demand big time.

And prolly 95% of the price of the so-called "technology advances" in the fracing industry will recover, as manpower, service companies and equipment suddenly become in short supply.

So, back to your question.... I can't accurately answer your question about the actual break even prices for the U.S. fracing industry.  But it sure as heck isn't $25 (what the heck is the article's author smoking?).

Factoring in the huge backlog of debt + interest due on the debt, it must surely be well over $60 break even cost, and I would guess it is closer to $80 break even.

Just my opinion; as always, you are free to disagree.

And in this case, I fully expect an outcry of disagreement from a heck of a lot of people. 

No worries.  I have been over this argument many times before, and if you include the backlog debt + interest, there is no way in hell that there is a break even price of $25 for fracing.

Near as I can tell, up through 2017, the U.S. Shale Oil industry has spent more than it earned. 

In other words, up through 2017, the U.S. Shale Oil industry as a whole has lost money.

Hence my guesstimate of an $80 actual break even price.

Scuse me now, I'll need to duck the bricks that are going to be thrown at me for this comment ...

==============================

So.... on the bright side, WSJ at least acknowledges that there are problems with U.S. Shale Oil financials.

But WSJ still shoots itself in the foot again by renaming a $2 billion loss as "seeing profits erode".  That's Elon Musk style doublespeak.  Up is down.  Left is right.

Repeating my earlier comment for emphasis, and to counter WSJ's misleading assertions:

"In other words, up through 2017, the U.S. Shale Oil industry as a whole has lost money."

 

And in keeping with my grumpy Tesla shareholder persona for this comment...

hey-you-kids-get-the-f-off-my-lawn-damn-21888668.png.aa422d112ed6b2f625bcbb57739179c3.png

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In the land of the Wall Street Journal, the land that lends the money to the shale oil industry, everything is on course with a slight erosion in profits.  Anything above their projected losses is a profit.  What's the problem?  (sarcasm intended)

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(edited)

7 minutes ago, Tom Kirkman said:

Yep, Gran Torino was a good movie.

And a darn nice Gran Torino, too!

image.png.81b74a3eff5a3bb13e4199a5ad81bb75.png

Edited by Dan Warnick

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(edited)

Can I start a thread on gas guzzlers from the past?  You know, what cars everybody had and loved when they were younger?

Edited by Dan Warnick
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To be fair, most shale operators were heavily hedged, and were just coming off a oil rout that they wanted to avoid again. Those collars stripped them of earnings when prices climbed this year.  

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(edited)

Tom, you have provided me with much education on this topic of shale profitability or perhaps better characterized as shale un-profitability.  So I'm asking for your educated guess.  How long will the shale ponzi scheme likely continue before it dries up or the industry and its financiers are forced to admit its not profitable.  Or, perhaps, is it possible that oil will rise to $80 or more a barrel and shale starts to pay for itself, plus some profit?  Or does recovered oil from shale drilling drop off too fast to pay for itself much less profit?

TXPower

Edited by TXPower
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Enjoyed the commentary above, and agree with the WSJ article. There is a great book on geology, written in pieces by John McPhee over the last forty years--"Annals of the Former World." For petroleum, the incredible thing is that algal deposits had to be "cooked" at just the right temperature--about the same as a cup of hot coffee--for about a million years in order to yield crude oil. I'm talking about mature oil, not kerogen, or so-called oil shale (as opposed to shale oil; thermogenesis is the difference). So we're looking at an incredibly rare commodity that took forever to build, and yet all these people who gladly pay six bucks for a Starbucks latte gripe about $4 gas at the pump. Well, that's over. Sooner or later the marketplace demands a profit . . . or the whole thing shuts down. The price point where a profit can be made, predictably, in 2018, is about $100. The poor economy in what we're doing to get the oil is due in part to rising costs, sure, but even more important is the fact that a good producer is only able to extract about 10% of the deposit. That will improve with time and the person who figures this out will revolutionize the industry, just as the person who figures out how to clean up frack water and use it for the next well drilled from a pad. And the person who is able to extract rare minerals from the frack water . . . things like lithium, for example. That's all coming, but until it does, it's going to be a tough market out there. Alarmingly, despite having an energy secretary from Texas, the United States still doesn't have an energy plan. The global market is far more haphazard than one would think, and it manipulated without guilt or fear. We need an energy policy, and a realization that this stuff is precious, and deserves a greater price than coffee water!

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This half trillion dollars of debt, for an incremental five million barrels a day, works out to $100,000 per flowing barrel of development cost.  Not a good news number, however, how many large scale offshore or oilsands projects have numbers like this?

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7 hours ago, TXPower said:

Tom, you have provided me with much education on this topic of shale profitability or perhaps better characterized as shale un-profitability.  So I'm asking for your educated guess.  How long will the shale ponzi scheme likely continue before it dries up or the industry and its financiers are forced to admit its not profitable.  Or, perhaps, is it possible that oil will rise to $80 or more a barrel and shale starts to pay for itself, plus some profit?  Or does recovered oil from shale drilling drop off too fast to pay for itself much less profit?

TXPower

Thanks for your kind words, TXPower.

Your guess is probably as good as mine.  If WTI reaches $100 then yes, it will be profitable, but then prices will crash yet again, horribly.

If I recall correctly, the Saudis figured out that the U.S. Shale Oil industry will likely deplete most of its recoverable shale oil resources by 2024, and are mostly just biding their time until then.

@Mike Shellman can probably provide you with better information on this than I can:

https://www.oilystuffblog.com

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18 hours ago, Tom Kirkman said:

Thanks for your kind words, TXPower.

Your guess is probably as good as mine.  If WTI reaches $100 then yes, it will be profitable, but then prices will crash yet again, horribly.

If I recall correctly, the Saudis figured out that the U.S. Shale Oil industry will likely deplete most of its recoverable shale oil resources by 2024, and are mostly just biding their time until then.

@Mike Shellman can probably provide you with better information on this than I can:

https://www.oilystuffblog.com

Thanks Tom.

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On 8/13/2018 at 2:59 AM, Dan Warnick said:

Can I start a thread on gas guzzlers from the past?  You know, what cars everybody had and loved when they were younger?

educate us!

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20 minutes ago, TomTom said:

educate us!

 

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On 8/13/2018 at 10:59 AM, TXPower said:

Tom, you have provided me with much education on this topic of shale profitability or perhaps better characterized as shale un-profitability.  So I'm asking for your educated guess.  How long will the shale ponzi scheme likely continue before it dries up or the industry and its financiers are forced to admit its not profitable.  Or, perhaps, is it possible that oil will rise to $80 or more a barrel and shale starts to pay for itself, plus some profit?  Or does recovered oil from shale drilling drop off too fast to pay for itself much less profit?

TXPower

May I answer for Tom, TX? The answer is that the shale oil mirage will continue as long as the oil price and the financial manipulations still allow investors to think that 2012-14 prices were on a trend line, rather than recognizing that those high prices were on an unsustainable bubble. When it becomes undeniable that a sound price projection is $40, not Tom's hoped-for $80, then the foolishness will be forced to cease.

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On 8/13/2018 at 2:11 AM, Tom Kirkman said:

Sometimes I just want to dump a bucket of cold water on the rhetorical head of Wall Street Journal writers who obstinately refuse to report on the fact that overall, the U.S. Shale Oil industry has so far been a money losing scheme.

I'm very much pro-Oil & Gas.  But my issue with U.S. Shale Oil industry is that so far, for the most part, it is a debt scheme, financed by next-to-zero-interest "free money" loans, and the industry burns more cash than it gets.  Kinda like Tesla.  So in this thread I'll be kinda like a grumpy Tesla shareholder after Elon says he lost more money but everything is great....

Here's the Wall Street Journal link - you probably will get a paywall if you click on the link here.  Easy enough to bypass the paywall, just copy & paste a sentence from the article into Google (not Google News) and WSJ will normally allow access past their paywall.

Frackers Burn Cash to Sustain U.S. Oil Boom

"American oil companies—primed to reap the benefits of rising prices after years of wringing more from wells for less—are seeing profits erode in the face of rising costs."

==============================

Profits ???  Profits erode ???  Yeah, more on that in a minute...

==============================

"Those operational challenges make balancing lofty growth objectives and demands for fiscal restraint increasingly difficult. If the companies continue to stumble, the result could be a higher cost of capital to finance the ongoing U.S. energy boom or a slower pace of growth.

Two-thirds of U.S. oil producers failed to live within their means in the second quarter, even as oil rose above $70 a barrel. Collectively, 50 major U.S. oil companies reported in their second-quarter results that they have spent $2 billion more than they took in, according to an analysis of free cash flow by FactSet."

==============================

Ok, after that miscue in their opening sentence about "profits eroding" WSJ admits that "seeing profits erode" is actually a $2 billion loss.  Not quite the same as profits reducing is it?

With what I just mentioned now, please feel free to read the entire WSJ article, realizing that WSJ euphemism of "profits eroding" is in reality a cash burn and cash loss.

For comparison, here's an Oil Price article from 6 months ago:

Why Is The Shale Industry Still Not Profitable?

Echoing the criticism of too much hype surrounding U.S. shale from the Saudi oil minister last week, a new report finds that shale drilling is still largely not profitable. Not only that, but costs are on the rise and drillers are pursuing “irrational production.”

Riyadh-based Al Rajhi Capital dug into the financials of a long list of U.S. shale companies, and found that “despite rising prices most firms under our study are still in losses with no signs of improvement.” The average return on asset for U.S. shale companies “is still a measly 0.8 percent,” the financial services company wrote in its report.

Moreover, the widely-publicized efficiency gains could be overstated, at least according to Al Rajhi Capital. The firm said that in the third quarter of 2017, the “average operating cost per barrel has broadly remained the same without any efficiency gains.” Not only that, but the cost of producing a barrel of oil, after factoring in the cost of spending and higher debt levels, has actually been rising quite a bit.

Shale companies often tout their rock-bottom breakeven prices, and they often use a narrowly defined metric that only includes the cost of drilling and production, leaving out all other costs. But because there are a lot of other expenses, only focusing on operating costs can be a bit misleading.

The Al Rajhi Capital report concludes that operating costs have indeed edged down over the past several years. However, a broader measure of the “cash required per barrel,” which includes other costs such as depreciation, interest expense, tax expense, and spending on drilling and exploration, reveals a more damning picture. Al Rajhi finds that this “cash required per barrel” metric has been rising for several consecutive quarters, hitting an average $64 per barrel in the third quarter of 2017. That was a period of time in which WTI traded much lower, which essentially means that the average shale player was not profitable.

 

==============================

And I will shamelessly quote one of my own comments from May:

Difficult to say what the actual break even price for U.S. Shale oil is.  The decline rates average around 80% decline in 3 years.

I would hazard a guess that the actual break even price would be around $80 or so.  Don't shoot me, let me explain...

Forbes, Bloomberg, MSM tend to ignore the elephant in the room of the massive debt that financed the U.S. Shale oil boom. Still mostly unpaid, and still racking up interest due.

$293 billion of debt just in bonds. Let alone all of the bank loans.  Easily half a Trillion dollars of debt - that is what bankrolled the U.S. Shale revolution.

Most MSM, when they discuss breakeven prices, neglect to include the massive amounts of debt into their calculations.

And the MSM tends to throw out a red herring of "technology advances" that "drove down" the break even costs.

The bulk of these so-called "technology advances" in the U.S. fracing industry is simply squeezing down to virtually no profits, the producer's costs for manpower rates, costs for equipment, costs for Service Companies.

As the price of oil recovers, the manpower that got bled dry by super low day rates, the Service Companies that survived on pretty much no profits for the past few years, the equipment renters who have been idle since 2015 ....  all of these rates will go up, as there services are coming back into demand big time.

And prolly 95% of the price of the so-called "technology advances" in the fracing industry will recover, as manpower, service companies and equipment suddenly become in short supply.

So, back to your question.... I can't accurately answer your question about the actual break even prices for the U.S. fracing industry.  But it sure as heck isn't $25 (what the heck is the article's author smoking?).

Factoring in the huge backlog of debt + interest due on the debt, it must surely be well over $60 break even cost, and I would guess it is closer to $80 break even.

Just my opinion; as always, you are free to disagree.

And in this case, I fully expect an outcry of disagreement from a heck of a lot of people. 

No worries.  I have been over this argument many times before, and if you include the backlog debt + interest, there is no way in hell that there is a break even price of $25 for fracing.

Near as I can tell, up through 2017, the U.S. Shale Oil industry has spent more than it earned. 

In other words, up through 2017, the U.S. Shale Oil industry as a whole has lost money.

Hence my guesstimate of an $80 actual break even price.

Scuse me now, I'll need to duck the bricks that are going to be thrown at me for this comment ...

==============================

So.... on the bright side, WSJ at least acknowledges that there are problems with U.S. Shale Oil financials.

But WSJ still shoots itself in the foot again by renaming a $2 billion loss as "seeing profits erode".  That's Elon Musk style doublespeak.  Up is down.  Left is right.

Repeating my earlier comment for emphasis, and to counter WSJ's misleading assertions:

"In other words, up through 2017, the U.S. Shale Oil industry as a whole has lost money."

 

And in keeping with my grumpy Tesla shareholder persona for this comment...

hey-you-kids-get-the-f-off-my-lawn-damn-21888668.png.aa422d112ed6b2f625bcbb57739179c3.png

Drilling for oil has always been a risky business. The lucky win. The unlucky lose. Just as in real life.

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On 8/14/2018 at 12:13 AM, Tom Kirkman said:

If WTI reaches $100 then yes, it will be profitable, but then prices will crash yet again, horribly.

Was thinking with the high $ shale producers selling in $ and $ denominated costs will be at a disadvantage to other country producers with $ income but mainly local, weaker, currency costs. A further reason that shale may not be as cheap as producers would like to believe.

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