U.S. Shale Oil Debt: Deep the Denial

[Tom Kirkman + 8,860]

Mike Shellman writes again.  No need for me to elaborate much on his persistent and very much needed gentle nudgings about debts coming due in the U.S. Shale Oil industry. 

Ignoring debt doesn't make it go away < cough > Venezuela < cough > 

Deep The Denial

By year end 2019 I firmly believe the US LTO industry will then be paying over $20B annually in interest on long term debt. ...

In other words, at the moment about 29% of total LTO production in America is used just to pay debt interest.

Using its own "breakeven" prices the US shale oil industry will ultimately  have to produce 9G BO of oil, as much as it has already produced in 10 years...just to pay its total long term  debt back.  Essentially the only chance it has of doing that is if oil prices  go to $125 a barrel, and stays there for a very long time.

[Tom Kirkman + 8,860]

1 hour ago, mthebold said:

If it's so risky, why would anyone issue this debt?

Good question.  I can't answer it, though.

[Dan Warnick + 6,100]

1 hour ago, mthebold said:

If it's so risky, why would anyone issue this debt?

Simple, really simple:  OPM (other people's money).  And zero % interest rates.  Payback is going to be hell.

[Dan Warnick + 6,100]

1 minute ago, mthebold said:

But whose?

Wall street investment funds: retirement funds, hedge funds, banks themselves using customer savings and deposits.  That last one really pisses me off.  After the depression, laws were enacted to NOT allow banks to do this; these laws have been reversed, I think it was signed by Clinton, and now the banks are allowed to speculate with deposits.  This will cause runs on banks.  This is plain and simple greed.  Why?  Because they did not hide the fact that they reversed these laws, but everybody that was paying attention seemed to say "well, so long as I get a better return forever".  Well, forever is coming and when it gets here let's see how much people's perception of what FDIC coverage they have turns out to be real.

[DA? + 301]

Saw an interesting panel discussion earlier this year on investments in the energy sector, one of the panel was from GE, another from a large energy investment fund and the last I can't remember. Basically they said everyone was running away from investing in the fossil fuel world and especially fracking related industries. It was funny at the end in the questions a very angry woman stood up and said something along the lines that she had expected a talk about investing in fossil fuels not a talk on renewables. I fully expect it will be the USA government that will bail out the frackers.

[Marina Schwarz + 1,576]

3 hours ago, mthebold said:

If it's so risky, why would anyone issue this debt?

Here's my take: banks/funds/hyenas saw how the industry survived the 2014 crisis, thought there's more money to be made once prices started recovering, got greedy, pardon, remained greedy, extended the credit/bought the debt.

[Rasmus Jorgensen + 1,169]

3 hours ago, mthebold said:

If it's so risky, why would anyone issue this debt?

The risk has to be viewed in context. Yes, economics of shale does not look perfect, but it is inherently short-cycle. Whereas economically cheap deepwater projects takes years to develop. There is a lot of economic research into this tendency in general that stock market does not necessarily allocate capital logically. This also indirectly affects the people making the investment decisions in the large E&P companies... Simply put : the unccertainty of Oil & Gas' future means that investors considers it less risky to invest in projects that sees first oil a lot quicker... Another way of putting is that either we are setting ourselfes up for a big price spike in the future or the theme of O&G as dying industry will eventually become a self-fulfilling prophecy. 

[Epic + 390]

10 hours ago, mthebold said:

If it's so risky, why would anyone issue this debt?

 

9 hours ago, Tom Kirkman said:

Good question.  I can't answer it, though.

Think in terms of the 2008 housing market crisis.  The brokers make a lot of money for every loan they made, so there is no reason for them NOT to make the loan as long as they can check all of the boxes to get it signed, sealed and delivered.  Bad loans become good loans when insurance is placed onto them so as to boost their credit rating.  Once the credit rating is boosted, this allows private investors as well as institutional investors (like retirement funds, hedge funds, banks themselves using customer savings and deposits) to buy those loans at a high price from the people who know they are worthless loans (to get those bad loans off of their books), just like @Dan Warnick said.  But doesn't this put the insurance companies at great risk?  Of course it does, but since they are not regulated in the same way as banks and securities, they are allowed to be over-leveraged, which means they make huge amounts of cash until bankruptcy stops it all.  Although the assets of the insurance companies are lost in bankruptcy, the top dogs get to keep all of the millions they "earned" in salaries and bonuses.  Moreover, since this whole scheme was founded on the fact that bad loans were made that cannot be repaid, the people who orchestrated the scheme in the first place know to short those oil companies, allowing them to make billions of dollars as the stock prices of those oil companies crash; then they use that cash from the short positions to buy up all of the oil companies' assets at rock-bottom prices during bankruptcy proceedings.  

This scheme has been around since Nathan Rothschild did it back during the Napoleon wars, and they and others have continued to do it since.  It is the average person who loses.  They lose not only their jobs but also their tax dollars, because the government will be forced to bail everyone out.  Although there is no legitimate reason to bail every one out (there are actually good reasons not to: see Sal Khan's ideas during the housing crisis), the people who rigged the whole scheme in the first place will then use their excess wealth to buy votes in Congress.  After all, there is a very very important reason why every major political candidate has a "Foundation" that allows unlimited donations...and it has nothing to do with "philanthropy."  Getting that money out of the foundation and into the pocket of the politician is a bit more complicated, but you can rest assured, they have figured that one out as well.  

  

[BillKidd + 139]

11 hours ago, mthebold said:

If it's so risky, why would anyone issue this debt?

The geologist, Art Berman, has been harping on this scheme for many years. I think the essence is that greed drives it In the era of zero interest rate policy (ZIRP), if they can get a few percent, or several percent, from issuing paper to oil companies, greed drives them to do it. They don't like NOT making money, gotta put it somewhere. The oil companies bake the books, making everything look rozy with good IRR but they don't count sunk costs, leasehold costs, etc.

I can't tell you how many thousands of shale wells I have looked at (production history) that will NEVER pay out. Forget profit, just try to get payback! Yes, there are sweet spots in shale fields, but if you look at the entire field including all the crappy wells, it's not good.

[Rasmus Jorgensen + 1,169]

I am sure that Wall street has something to do with it, but I think there is more to it than that. Think of a major deepwater development. It may have good overall economics, but it takes years to develop and requires billions of dollars of upfront investment. Shale on the other hand has a much smaller upfront investment and sees first oil much quicker. Now, ask yourself : if you were an investor and the narrative was that oil and gas was a dying industry would you have the courage to invest in projects that takes 15 + years to pay off? 

[Mike Shellman + 548]

In my article, or post, I attempted to give some perspective on the role that long term debt plays in shale oil development in the US and found that 1.5MM BOPD just to service that debt was a shocker. Using the same breakeven prices the shale industry uses I have in the past determined that the shale oil industry will have to produced 9G BO in the future just to get OUT of debt, to get back to even, an equal shocker. So for all the good shale oil has done our nation the past decade, it has not even been paid for yet.

Why does this lending continue? Both grantor and grantee believe they can drill they're way out of all this debt and they are both penned up like goats now with no other alternative but to keep going. Both hope for higher prices. I don't think that will happen high enough, or long enough, to solve the problem. A debt-ridden world, full of debt-ridden consumers simply cannot cope with $100 oil anymore and I do not see a pathway for ever paying this debt back now, short of sending all rigs to the barn and selling assets. If you are a shale company that is the same as liquidating yourself and nobody wants to do that. How can we expect the shale oil industry to find Jesus and start returning profits and paying back debt? It has done nothing of the sort in the last 10 years, It made promises just a year ago to angry investors and has done the opposite of what it said it would do. It is still adding rigs and outspending revenue.

As interest rates increase lenders will be looking for better venues to park their money than debt saturated shale plays that have NEVER made money. Coming shale debt refinancing is going to be neat to watch. 

Its becoming clear that terminal decline rates are increasing and the case for long fat DCA tails is losing its luster. I do NOT believe marginal shale oil wells will be  assumed by smaller operators given those decline rates, the incredibly high cost of plugging wells and decommissioning tens of thousands of locations, and the fact that MORE money would have to be borrowed by the buyer.

Water going in and water coming out of wells in the Permian Basin is, in my opinion, going to be the next big wake up call.

Its painful all this; America was promised decades of shale oil, energy independence, and the oil isolationism policies now be implemented by this administration are a disaster. Exporting America's last oil resources away at $20 bbl. discounts to Brent is really dumb.

If this is the end of the oil era, it better hurry because shale oil is NOT going to get us to the end without a lot of hurt.

Thank you, Tom Kirkman.

Mike Shellman

 

 

 

 

 

 

 

[BillKidd + 139]

9G barrels oil. What does 9G mean?

[Mike Shellman + 548]

Billion

[BillKidd + 139]

Mike, you'll need to be more explicit than that for this bumpkin. Billion is abbreviated in my world with a B, not a G. I have no idea what you mean.

[Mike Shellman + 548]

9,000,000,000 as in billion, 9G https://www.reference.com/math/abbreviation-billion-42de94782db92555

[BillKidd + 139]

7 minutes ago, Mike Shellman said:

9,000,000,000 as in billion, 9G https://www.reference.com/math/abbreviation-billion-42de94782db92555

The article says " The international abbreviation for billion is "G," as in $3G to indicate $3 billion."

Holy cow, I bet I have read a billion pages of articles/books about the oil biz over the past ten years, alone, and I have never heard of G to mean billion!

[Mike Shellman + 548]

Sorry; I am just a small town Texas boy trying to "broaden" his horizons. My friends around the world interested in economics and oil reserves, etc. taught me that.  

[Dan Warnick + 6,100]

15 minutes ago, Mike Shellman said:

Sorry; I am just a small town Texas boy trying to "broaden" his horizons. My friends around the world interested in economics and oil reserves, etc. taught me that.  

There's already too many "B"s used in oil discussions.  I vote for G.  Wait a minute, G is already used uber-extensively, as in the likes of 3G, 4G, 5G.

@Rodent This is your next competition: What is the best abbreviation for billion?  My submission is TDM, as in Too Damn Many.  Trillion can be "Far TDM".

[ronwagn + 6,290]

All of the comments seem to dismiss the natural gas finds from fracking. What is the relative value of natural gas output from fracking and the future potential for tapping it from the wells? I see natural gas as the predominant energy source when oil becomes too costly. 

[Dan Warnick + 6,100]

2 minutes ago, ronwagn said:

All of the comments seem to dismiss the natural gas finds from fracking. What is the relative value of natural gas output from fracking and the future potential for tapping it from the wells? I see natural gas as the predominant energy source when oil becomes too costly. 

Please start a new topic.  Excellent point of discussion and I am very interested in further understanding exactly your question.  @Jan van Eck touched on many apparently very positive points about both gas and liquid forms of natgas, but I would like to see a full discussion; not about which one is better, but whether or not it really is so good and, if it is, why we aren't rapidly moving to use it for transportation on a massive scale. 

Can/will you start it?

[ronwagn + 6,290]

DW, Will do. Thanks for the interest. 

[Tom Kirkman + 8,860]

9 hours ago, Mike Shellman said:

How can we expect the shale oil industry to find Jesus and start returning profits and paying back debt? It has done nothing of the sort in the last 10 years, It made promises just a year ago to angry investors and has done the opposite of what it said it would do. It is still adding rigs and outspending revenue.

Nick Cunningham's latest:

U.S. Shale Has A Glaring Problem

A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) and the Sightline Institute detail the “alarming volumes of red ink” within the shale industry.

“Even after two and a half years of rising oil prices and growing expectations for improved financial results, a review of 33 publicly traded oil and gas fracking companies shows the companies posting negative free cash flows through June,” the report’s authors write. The 33 small and medium-sized drillers posted a combined $3.9 billion in negative cash flow in the first half of 2018.

... "Current trends suggest that the shale industry as a whole may finally turn a profit in 2018, although downside risks remain,” the IEA wrote in July.

[ronwagn + 6,290]

1 hour ago, Dan Warnick said:

Please start a new topic.  Excellent point of discussion and I am very interested in further understanding exactly your question.  @Jan van Eck touched on many apparently very positive points about both gas and liquid forms of natgas, but I would like to see a full discussion; not about which one is better, but whether or not it really is so good and, if it is, why we aren't rapidly moving to use it for transportation on a massive scale. 

Can/will you start it?

I started it as a new topic. Here it is 

 

[Mike Shellman + 548]

1 hour ago, Tom Kirkman said:

Nick Cunningham's latest:

U.S. Shale Has A Glaring Problem

A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) and the Sightline Institute detail the “alarming volumes of red ink” within the shale industry.

“Even after two and a half years of rising oil prices and growing expectations for improved financial results, a review of 33 publicly traded oil and gas fracking companies shows the companies posting negative free cash flows through June,” the report’s authors write. The 33 small and medium-sized drillers posted a combined $3.9 billion in negative cash flow in the first half of 2018.

... "Current trends suggest that the shale industry as a whole may finally turn a profit in 2018, although downside risks remain,” the IEA wrote in July.

Tom, this is good; I like Cunningham. Unfortunately this topic of shale oil debt seems to have turned into something totally unrelated to the subject matter...natural gas. Associated natural gas, according to Berman, now represents 45% of total gas production in America. It is a by- product of oil and is being wasted, up flare stacks, at an enormous, growing rate. It will be many, many  years before sufficient infrastructure is in place to do anything with this gas as a transportation fuel; I don't see the correlation between the two subjects. Sorry man, too many non oily types here trying to promote an agenda.

Thanks, sir. BTW, $4G of losses thru 2Q18 is chump change...its way more than that ! Good luck.

 

[ronwagn + 6,290]

2 minutes ago, Mike Shellman said:

Tom, this is good; I like Cunningham. Unfortunately this topic of shale oil debt seems to have turned into something totally unrelated to the subject matter...natural gas. Associated natural gas, according to Berman, now represents 45% of total gas production in America. It is a by- product of oil and is being wasted, up flare stacks, at an enormous, growing rate. It will be many, many  years before sufficient infrastructure is in place to do anything with this gas as a transportation fuel; I don't see the correlation between the two subjects. Sorry man, too many non oily types here trying to promote an agenda.

Thanks, sir. BTW, $4G of losses thru 2Q18 is chump change...its way more than that ! Good luck.

 

Mike, you just brought up a major correlation between the two products! They are associated natural resources. The technology and equipment to use natural gas onsite already exists. Flaring, in large amounts should be prohibited. It is a waste of a valuable natural resource. Governments need to be more restrictive of flaring. 

My new topic is listed under the Natural Gas topic.