US Shale Is Already in Big Trouble. Now Imagine What Happens If China Restores Iranian Oil Purchases

If China starts taking in all the discounted crude Iran can drill the price could tumble by as much as $30

Fracking is a technical wonder and a great feat of American engineering but it is not earning shareholders any dividends


It was a rough week for the U.S. shale industry.

A series of earnings reports came out in recent days, and while some drillers beat expectations, there were some huge misses as well.

Concho Resources, for instance, saw its share price tumble 22 percent when it disclosed several problems at once. Profits fell by 25 percent despite production increases. Concho conceded that it would slash spending and slow the pace of drilling in the second half of the year.

It also said that one of its projects where it tried to densely pack wells together, which it called “Dominator,” the results were not as good as they had hoped. The project had 23 wells, but production disappointed. The “30 and 60 day production rates were consistent with our other projects in that area, but the performance has declined,” Leach said. So, the company will abandon the densely packed well strategy and move forward with wider spacing.

In the second quarter the company had 26 rigs in operation, but that has since fallen to 18. At the start of the year, the company had 33 active rigs.

“We made the decision to adjust our drilling and completion schedule in the second half of the year to slow down and not chase incremental production at the expense of capital discipline,” Concho’s CEO Tim Leach told analysts on an earnings call. He said the company’s aiming for “a free cash flow inflection in 2020.”

The company reported a net loss of $792 million for the first six months of 2019. As Liam Denning put it in Bloomberg Opinion: “It’s sobering to think that Concho, valued at more than $23 billion in the spring of 2018 and having since absorbed the $7.6 billion purchase of RSP Permian Inc., now sports a market cap of less than $16 billion.”

The reason these results are important is because they may not be one-off problems for individual companies, but are more likely indicative of the problems plaguing the whole sector. “There is little doubt this is a big event for the sector and a brake of this nature will create lasting impact,” Evercore analyst Stephen Richardson wrote in a note, referring to Concho’s poor results.

“How companies still, after all these years we have wailed and gnashed our teeth, manage to over-promise and under-deliver, remains an infuriating mystery,” Paul Sankey wrote in a note for Mizuho Securities USA LLC.

Whiting Petroleum had an even worse week. Its stock melted down on Thursday, falling by 38 percent after reporting a surprise quarterly loss that badly missed estimates. The company announced that it would cut its workforce by a third.

According to the Wall Street Journal and Wood Mackenzie, a basket of 7 shale drillers posted a combined $1.58 billion in negative cash flow in the first quarter, four times worse than the same period a year earlier.

While the results, in many cases, were bad, the declines in share prices were hugely amplified by the announcement of new tariffs on China, which caused a broad selloff not just in the energy sector, but for equities of all types. Here is a sampling of how the share prices of some oil companies fared on Thursday:

  • Whiting Petroleum -38 percent
  • Concho Resources -22 percent
  • Pioneer Natural Resources -7.5 percent
  • EOG Resources -5.5 percent
  • Devon Energy -6.8 percent
  • Continental Resources -7.8 percent
  • Royal Dutch Shell -6.1 percent
  • Chevron -2 percent
  • SM Energy -9.0 percent

But the poor quarterly performances were true before President Trump took to twitter. Even with oil down and stocks perhaps looking cheap, “it’s hard to call it a contrarian opportunity right now,” Matt Maley, chief market strategist at Miller Tabak, told CNBC. “This group has really been dead money most of this year.”

Investors are clearly souring on the sector. As Bloomberg notes, speculative positioning from traders fell to the lowest level since March 2013, a sign of “investor apathy” towards crude oil and energy stocks.

While shale E&Ps languish, the oil majors are not slowing down. Exxon said that its oil production rose by 7 percent, driven by the Permian. In fact, its production from the Permian rose 90 percent in the second quarter from a year earlier. Earnings dropped by 21 percent, however, and the company cited lower prices and poor downstream margins.

But the majors aggressive bet on U.S. shale is a sign of the times. Small and medium drillers are getting hammered and seeing their access to capital close off, which is forcing budget cutbacks and otherwise leading to steep selloffs in their share prices. The majors, on the other hand, are only in the early stages of a multi-year bet on shale. They can stomach losses on individual shale projects for years, scaling up while they earn profits elsewhere.

So, despite the widespread financial losses for the shale sector, it’s not clear that production is set to grind to a halt.


Crude oil prices could sink by as much as $30 a barrel if China decides to buy Iranian crude oil in retaliation to the latest U.S. tariff measures, according to Bank of America Merrill Lynch.

“While we retain our $60 a barrel Brent forecast for next year, we admit that a Chinese decision to reinitiate Iran crude purchases could send oil prices into a tailspin,” a BofA Merrill Lynch Global Research report said Friday, warning that prices could sink by as much as $20-30 a barrel in that scenario.

The Chinese Ministry of Commerce has threatened countermeasures after President Donald Trump threatened to slap a 10% tariff on $300 billion dollars of Chinese goods. The decision Thursday floored oil markets and sent crude plunging 8% — the most in four years.

Analysts warn that “oil volatility is set to rise again” as markets wait for a Chinese response to the latest US tariff threat, which could include purchasing Iranian oil.

“This decision would both undermine US foreign policy and cushion the negative terms-of-trade effects on the Chinese economy of rising US tariffs,” the report added.

Iranian oil exports slide

Shipments of Iranian oil fell below 550,000 b/d (barrels per day) in June from about 875,000 b/d in May and about 2.5 million b/d in June 2018, according to data from S&P Global Platts. Roughly half of Iran’s exports were shipped to China in June and July, according to the firm.

But a Chinese decision to purchase Iranian oil in a further defiance of U.S. sanctions could act as a double edged sword, according to other analysts.

“Iran would welcome any opportunity to increase its production whether or not it breaches the terms of the U.S. sanctions, but the strategy there would introduce China to a partner over which it doesn’t have an enormous amount of control,” Edward Bell, Director of Commodities Research at Emirates NBD told CNBC’s “Capital Connection.”

“Don’t forget there are other producers that would also be targeting that trade with China, so for instance you could see Iraq or Saudi Arabia step in and try and discount the volumes that they would be exporting to China as a way to circumvent Iran getting that extra market share,” he added.

Traders fret on crude demand

Crude oil prices slumped further on Monday, as traders focused on a deteriorating demand outlook.

Analysts at BofA Merrill Lynch said the latest round of US tariffs could reduce global oil demand by 250,000-500,000 barrels per day, adding to worries about a demand slowdown that is challenging the fundamentals for crude.

“The kind of deterioration in global trade volumes that we’ve seen this year does mathematically lead into lower demand for crude oil,” Bell added.

“If that carries on through the end of 2019 or perhaps even 2020 as we enter the firm end of the US election cycle when Trump is likely to want to maintain that hard stance on China, then it could be a very difficult barrier for crude to try and break through some of those demand concerns.”

Brent crude was trading at $60.94 early Monday, down around 1.5%, while WTI traded at $54.81, again slipping around 1.5% for the session.

Source: CNBC

  1. Mary E says

    Silly people! Fracking costs more to get oil out of the ground than they get in returns when it finally gets to the international market….that’s right- International! When the government was pushing for fracking to make is alright to go into pristine lands to get the oil, they did it with the reasoning that it will make America independent of foreign oil! Hahaha the joke was on the people, who just continue to trust their govt..what a ponzi scheme of a corporation the US government is! It will crash sooner than later.

  2. DarkEyes says

    Swedish Greta Climatechange is coming to AIPAC-land in a phantastic luxury yacht.
    A real “Climate Change” yacht.
    she is coming to tell the “barbarians” in AIPAC-land how to change their climate, or … uhh … .
    Anyway, she might be used to promote CO2-Tax for the UN Inc./Department for Taxes.

    Could be of influence on the Stockmarket Price Index.

  3. JustPassingThrough says

    “Fracking is a technical wonder and a great feat of American engineering but it is not earning shareholders any dividends”

    Fracking is a friggin’ disaster. It’s effect on environment above and below ground and on humanity is catastrophic.

    Any fool that touts this ill conceived, moronic enterprise as “a great feat” has got his head up his *ss.

    F*ck your shareholders. This has been a ponzi scheme from the git go but only a braindead murikan wouldn’t see it to be so.

    Get a life N.C. hopefully on this planet and not the one in your wet dreams.

  4. Vish says

    American sanctions of mass destruction are a form of economic terrorism that is designed to starve, coerce, and subjugate nations that disobey the American Empire–whether that be against Iran, Venezuela, Cuba, North Korea, Russia, China, or Iraq (in the 1990s).

    These criminal American sanctions deserve to defied and violated.

    But Americans are so warped that they self-righteously believe they have a right to economically starve and subjugate these nations–all the while, they invert reality and portray American as being threatened by these nations.

    America is truly a nation of demonic mutherfuckers.

    And what the Americans fear is being exposed, called out, and then dealt with as such.

    Sanctions of Mass Destruction: America’s War on Venezuela

    1. Mary E says

      Venezuela is using other currency other than the USDollar now and that makes the US extremely unhappy…especially with the added ‘crime’ of having all that oil: the biggest reserves in the world….which the US is just salivating to get a hold of..but Russia and China should have something to say about their huge investments in Venezuela and of course, the Venezuelan oil company has switched its headquarters to Russia, preventing the US from its takeover…
      The fact that the US is starving out a country because it has what they want it the biggest crime a country can commit….when will they be stopped? Russia and China’s investments in Venezuela should be reason enough for them to get in there to protect Venezuela from collapse and their people from starving to death.

      1. XRGRSF says

        Venezuela was invited into the Chinese economic system, and began using yuan almost a year ago. Also, Venezuela is set to become the South American terminus for the OBOR project. It looks like the Evil Empire lost another one.

  5. chris chuba says

    To bypass U.S. sanctions I was wondering if Iran could (or was already) just filling up Iraqi flagged tankers to disuise their oil exports as Iraqi oil exports. After all both countries are on good terms with each other and both would benefit.

    The U.S. might stomp its feet but we want that base to remain in Iraq, there is only so much we can do without invading them yet again.

    1. Mary E says

      My question is why would Iraq import oil when it has so much of its own…or is it all being sent to the US and/or sold by the US on the international market???
      I’d love to know if Iran can use Iraqi flagged oil tankers to get their oil out too!
      Good question….

  6. John C Carleton says

    Get ear done!

  7. Garry Compton says

    One major problem with fracking – every frack = a nuclear explosion in the bedrock or sandstone. Bedrock/SS that could be close to natural clean water sources. Is that worth it ? But no biggy – the US military just has to take out Venezuela and then steal all of their -oil.

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