US Shale Industry Braced For Bankruptcies

Despite the fact that oil prices crashed last year cause by a situation of global oversupply, it was still relatively easy for US exploration and production companies to raise capital earlier this year. They were mainly doing this by selling debt or equities. But those sales have recently slowed pretty sharply, and the financial strain on the industry is growing


Dont be mistaken, however, the shale industry is not about to die. This industry has actually been responsible for rapid growth in US oil production since 2009 and there certainly are a large number of strong companies that have healthy balance sheets, low costs, or both, and they should be able to ride out the downturn. The thing is that there are very wide differences in resilience between companies. The ones with high costs or high debts, or both, face a uncertain a scary future.

Not less than 16 US oil production companies have defaulted this year, according to Standard & Poor’s, the rating agency. Probably the biggest failure of all of them has been Samson Resources, which was bought by a consortium led by KKR in 2011 for $7.2 billion. Last month it said it intended to seek bankruptcy protection in September.

At the moment there are already eight producers with credits ratings of triple-C or lower, meaning that “they’ve got about a year or less before they burn out of cash”, says Thomas Watters, a managing director at S&P.

A recent study found that the oil producer with the lowest full-cycle cost per barrel — a measure that combines the expense of extracting crude plus the investment needed to replace reserves — was Seven Generations, at about $20. The highest-cost producers were Breitburn Energy Partners and Denbury Resources, at about $70, according to Moody’s, the rating agency responsible for the study. The median full-cycle cost per barrel was about $51 for oil-focused companies. This impies that at present prices of about $46 for US crude, more than half of the producers are losing money.

It is highly expected that in the long-term supply and demand in the global oil market will come back into balance, and will thus send crude prices higher. Oil production in the US is already falling, according to the government’s Energy Information Administration. This reflects the 58% fall in the number of rigs drilling for crude since last October.

But this rebalancing of the market could be a lengthy process. While it is working through, more US shale producers are sure to fall by the wayside.