The Great American Shale Oil Bust Has Already Wiped Out $200 Billion in Wealth

And that's just debt accumulated by companies which already went belly up, not counting losses to stockholders, and inevitable future bankrupcies

$200 billion that could have gone toward launching positive money-flow enterprises which helped accumulate capital rather than consume it

Following the sharp re-drop in oil and natural gas prices in late 2018, bankruptcy filings in the US by already weakened exploration and production companies , oilfield services companies, and “midstream” companies (they gather, transport, process, or store oil and natural gas) jumped by 51% in 2019, to 65 filings, according to data compiled by law firm Haynes and Boone. This brought the total of the Great American Shale Oil & Gas Bust since 2015 in these three sectors to 402 bankruptcy filings.

The debt involved in these bankruptcies in 2019 doubled from 2018 to $35 billion. This pushed the total debt listed in these bankruptcy filings since 2015 to $207 billion. The chart below shows the cumulative total debt involved in these bankruptcies since 2015.

But this does not include the much larger losses suffered by shareholders that get mostly wiped out in the years before the bankruptcy as the shares descend into worthlessness, and that then may get finished off in bankruptcy court.

The banks, which generally had the best collateral, took the smallest losses; bondholders took bigger losses, with unsecured bondholders taking the biggest losses. Some of them lost most of their investment; others got high-and-tight haircuts; others held debt that was converted to equity in the restructured companies, some of which soon became worthless again when the company filed for bankruptcy a second time. The old shareholders took the biggest losses.

The Great American Fracking Bust started in mid-2014, when the price of WTI dropped from over $100 a barrel to below $30 a barrel by early 2016. Then the price began to recover, going over $70 a barrel in September and October 2018. But then it began to re-plunge. By the end of 2018, WTI had dropped to $47 a barrel.

Two major geopolitical events in the Middle East – the attack on Saudi Aramco’s oil facilities last September and the US assassination of Iranian Major General Qasem Soleimani – that would have shaken up oil markets before, only caused brief ripples, quickly squashed by the onslaught of surging US production. At the moment, WTI trades at $56.08 per barrel, which is still below where the shale oil industry can survive long-term:

And 2020 is starting out terrible for natural gas producers. The price of natural gas has plunged to $1.90 per million Btu at the moment, a dreadfully low price where no one can make any money. Producers in shale fields that produce mostly gas, such as the Marcellus, are in deeper trouble still, because oil, even at these prices, would be a lot better than just natural gas.

Producing areas with constrained takeaway capacity (it takes a lot longer to build pipelines than to ramp up production) are subject to local prices, which can be lower still. In some areas, such as the Permian in Texas and New Mexico, the most prolific oil field in the US, where natural gas is a byproduct of oil production, limited takeaway capacity has caused local prices to collapse, and flaring to surge.

The chart shows the spot price for delivery at the Henry Hub:

Texas at the epicenter.

The most affected state, in terms of the number of bankruptcy filings, is Texas, the largest oil producer in the US. Since 2015, the state had 207 oil-and-gas bankruptcy filings, of the 402 total US filings. In 2019, Texas had 30 of the 65 US filings.

Delaware, obviously, is not into oil and gas production, but into coddling corporations, and many companies are incorporated in Delaware, including some oil-and-gas companies in Texas. When they file for bankruptcy, they do so in Delaware. These are the eight states with the most oil-and-gas bankruptcy filings since 2015:

Bankruptcy filings are triggered when the E&P companies no longer get funding from Wall Street or from their banks to continue with their perennially cash-flow negative operations and service their debts. And this is what is happening now. Wall Street and the banks have started to demand that these companies stick to an entirely new mantra in the fracking business: “live within cash flow.”

When E&P companies run short on funding, they cut back on drilling activity which puts the squeeze on oilfield services companies that provide products and services to the oilfield, including drilling and completing wells. And then these OFS companies go bankrupt.

This is what happened to oilfield-services giant Weatherford which filed for a prepackaged bankruptcy last July. Back in 2014, before the oil bust, it had 67,000 employees; by July, it was down to about 26,000. The reorganization plan allowed Weatherford to shed $5.8 billion of its $7.6 billion in long-term debt. Old shareholders got wiped out. The creditors got 99% of the restructured company’s new shares.

In its report on the OFS bankruptcies, Haynes and Boone cited this pressure from Wall Street and its cascading effect, which Weatherford had pointed out in its bankruptcy filing:

We note that Weatherford, in its July 2019 filing, attributed its insolvency in part to reduced drilling activity by producers who have also been dramatically affected by the commodity price slump since 2015. Investors’ pressure on producers to “live within cash flow” is further reducing demand for OFS services and supplies leaving the OFS sector with little near term hope for a turnaround in prospects.

What this sector needs are much higher prices for oil and natural gas. But that cannot happen while production continues to surge. A large-scale culling in the sector – a lot more bankruptcies – could reduce production, and support higher prices.

But as soon as prices rise above certain levels, with investors still chasing yield at every twist and turn, the flood of new money will wash over the sector again, with investors having already forgotten by then that shale oil and gas was where money went to die every time. And this new money will cause a new surge in production, which will collapse prices once again. It’s a cycle that the shale industry has a hard time getting out of, under the current loosey-goosey monetary conditions.

Source: Wolf Street

  1. Hyman Griebowitz says

    According to Dr Skidmore, they stole 100 times that figure. Yawn

  2. Mary E says

    Shale oil has always been the most difficult and thus, expensive, oil to extract – all of these oil companies knew that from the get-go….Shell Oil’s project went belly up in the Rocky Mountains Western slope in the 90’s and that should have been the warning shot….but greedy dummies still wanted to make $millions thinking that they would have better luck than Shell…how delusional is that?
    AND why doesn’t the US keep their own oil (as was told to the people decades ago) so they aren’t reliant on the Middle East? Instead, they put it on the international market to make huge bucks, then invade the countries that have oil to get theirs! Does that make sense?I don’t think so.

  3. C D says

    Americans can’t win this game.
    If the prices go down, which is easy to manipulate by the already big producers then American petroleum companies go bankrupt.
    It is difficult to be profitable in this market with shale oil, if not impossible.
    Do we know for sure how much money shale oil industry got from the banks and has to be returned?

  4. CHUCKMAN says

    Shale oil is almost a symbol or metaphor for the United States today.

  5. Chris Chuba says

    I have been reading how shale is a house of cards for at least two years but U.S. oil production is now at 13M bbls/day, at the start of 2017 it was 9M.

    20yrs ago I would have been dancing in the street but today, neocons like Paul Gigot in the Wall Street Journal Report freely admit this enables U.S. aggression, ‘we don’t have to worry about oil production from bad actors like Iran and Venezuela (ie. we don’t have to negotiate with them, we can terrorize them)’

    If it is a house of cards then when will the Shrek victory dance end?

    1. Canosin says

      the biggest economy of all time…..????
      the biggest bubble in human history instead has been created……a monster bubble that’s gonna burst any time soon……
      think of this….according to recent polls…..41% of the US population does not have 1000 $ for emergency cases…bad infrastructure…..very bad contaminated tap water…bridges, roads, dams, rails…..just mentioning a few….a wholly corrupted education system…..federal debt over 23 tr…..state debt over 68 tr, ……and wars all over …..the petrodollar is soon history…..and the shale industries is a sham….well done America

      1. vlom2441 says

        Add to your list a failed education system and the millions without healthcare.

    2. James Willy says

      It Might end soon if a few of these countries would team up and all band together and FINALLY isolate these americunts. Bankrupt them. Get rid of all dollar assets in their countries. Dump the petrodollar. TODAY. Attack them. Over whelm them and make each attack on them extremely costly. Attack them from all directions at once. Attack their contractors on the ground face to face. Problem is nobody will do anything to even try to stop them. Even Russel Bentley *Texas* told me a couple weeks ago that his men are forbidden to shoot back at them. He says his men would be sent to jail if they fired at the nazis. Nobody will shoot at them. Nobody will take any action to try to make it stop So how do you expect an end?

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