Shale over leveraged. One of Best Financial ratios to determine: TOTAL DEBT ÷ TOTAL ASSETS

[Jabbar + 465]

This is one of many ratios bankers look at when considering loans or investors analyze that buy bonds of shale producers is EBIDTA ÷ Debt.  This and Cashflow from operation and financing.

They best ratio to determine bankrupt value is ASSETS(reserves) ÷ Debt.

During the early years of the shale industry with $100 oil the producers were making cash hand over fist.  The strategy was grow grow grow.  So ALL earnings were reinvesting and competing for new acreage full speed ahead while agreeing to exhorbanant royalties.  With interest rates so low many producers rather than give up equity in the company issued bonds. Investors looking for yield were all to happy to buy the bonds of these very profitable shale producers backed up with substantial assets. Investors knew oil prices "always" go up  .  .  . or so they thought.

Their assets (at least the one that counts) were their reserves. The valuation was total eztimated barrels of reserves times price of oil.  RESRVES X OIL PRICE = ASSETS VALUE. 

Were investors wrong buying bonds ?  Were Banks wrong making loans ?  Well virtually everyone believed the same about oil prices.  Hundreds of millions in loans and bonds were issued.

When 2014 to 2015 price crash occured many producer financial metrics were now upside down. What seemed like overnight many producers balance sheets turned upside down. TOTAL DEBT ÷ TOTAL ASSETS.  Some weak producers went under, however Investors and Banks "knew" oil was cyclical and prices "always" come back. .  .   or so they thought.

What the majority took as dogma is not always true.  They were wrong. 

In 2020 to 2021 hundreds of billions in shale producer debt is coming due.  There is always debt available BUT AT WHAT COST ?  Example: Chesapeake Resources 2021 bonds are trading at 22% yield. Not really an option for many. Investors won't buy equity issues in these over leveraged firms.  Some will reorganize under Chapter 11 and senior debt will own the company. Bond holder usually don't want to become equity investors and will probably take the highest offer for the reserves.

The talking heads on Financial TV ask why hasn't  the Consolidation commenced.  The answer is simple . . . why buy now when these firms have piles of debt when you can buy from the bond holders at substantially lower prices after out of business or after reorganization. 

The consolidation is coming. Generally speaking their are two types of shale producers (1) those that produce sub $30 breakeven (2) those that produce $45 to $50 breakeven.  The latter need to merge or suffer the consequences.

Buyers of distressed shale producers have there list ready waiting for the time the Consolidation to start.  U.S. Super Majors are reducing costs, consolidating their portfolio and raising cash.

For example EXXON continues to sell low return assets around the world to (1) fund Guyana growth (2) fund Mozambique growth and (3) purchase Permian add-on assets when consolidation starts . . . all while maintaining the need to pay a good dividend to placate investors.

Will be interesting few years in the Oil & Gas Industry. 

  

Edited November 28, 2019 by Jabbar

[Rob Kramer + 696]

I think (not 100%) your type (2) 45 to 50 break even producers may be closer to 52 - 57 break even . When talking break even I'd consider being able to pay debts that become due in that. Also if gas stays low or is flared that is 0 - 18$ per those barrels (equivalent) its unclear if your counting that in the break even. Considering wells vary (you know this) in gas / oil it can widen the break even alot. I'd even doubt the (1) group if capex is added - and if no capex theres the decline curve.  If there sub 30 say 25$ there clearing 25$ at 50$ wti ? 50% pre tax return? - closer to 30% after tax? Exxon (in Yahoo finance app) shows company Return on assets:2.5% on equity: 7.7% and profit/operating margins 5.5% . Probably 40$ break even or more with capex and low gas price and flaring for group (1) . My opinion 

[Jabbar + 465]

1 hour ago, Rob Kramer said:

I think (not 100%) your type (2) 45 to 50 break even producers may be closer to 52 - 57 break even . When talking break even I'd consider being able to pay debts that become due in that. Also if gas stays low or is flared that is 0 - 18$ per those barrels (equivalent) its unclear if your counting that in the break even. Considering wells vary (you know this) in gas / oil it can widen the break even alot. I'd even doubt the (1) group if capex is added - and if no capex theres the decline curve.  If there sub 30 say 25$ there clearing 25$ at 50$ wti ? 50% pre tax return? - closer to 30% after tax? Exxon (in Yahoo finance app) shows company Return on assets:2.5% on equity: 7.7% and profit/operating margins 5.5% . Probably 40$ break even or more with capex and low gas price and flaring for group (1) . My opinion 

Bottom line

CONSOLIDATION 2020 TO 2021

[ceo_energemsier + 1,818]

Shale's Haves and Have-Nots Fight for Fuel

 

 

https://finance.yahoo.com/news/shales-haves-nots-fight-fuel-140028068.html