By - Jim Vess

Almost a third of shale drillers at risk of bankruptcy or acquisition at current oil prices

Energize Weekly, July 1, 2020

The picture remains grim for shale oil and gas companies as nearly a third risk bankruptcy or acquisition at current oil prices. A survey of industry executives finds that most don’t expect a rebound until 2021 – if ever.

The problems for the sector have been growing for years, according to an analysis by the accounting and financial consulting firm Deloitte. Since 2010, the U.S. shale industry has posted $300 billion in negative cash flow, impaired more than $450 billion in invested capital and has seen 190 bankruptcies, the study said.

When the COVID-19 pandemic and brief oil price war between Saudi Arabia and Russia hit the market, many operators were already in a shaky position, leading to what Deloitte is calling a period of “great compression.”

“Starting in March 2020 with the onset of the COVID-19 pandemic, global oil supply and demand have diverged to an extent the world has never seen before,” Deloitte said.

The result was West Texas Intermediate (WTI) prices that slid to as low as $17 a barrel in April. On June 26, the price was $38 a barrel. WTI had begun 2020 at prices around $60 a barrel.

Deloitte calculates that at the current oil price range, about 30 percent of shale companies are “technically insolvent” and cannot break even at prices below $35 a barrel.

Oslo-based Rystad Energy estimates that a WTI price of $40 to $45 a barrel is needed to avoid an “explosion of financially distressed U.S. exploration and production companies.”

There were 18 bankruptcies among exploration and production companies in 2020 through May 31, according to law firm Haynes and Boone, LLP. The same number as in the first two quarters of 2019. In June, there were three more bankruptcies – Denver-based Extraction Oil & Gas, Tulsa, Okla.-based Chisholm Oil & Gas and Oklahoma City-based Chesapeake Energy Corp.

Fourteen oilfield services companies also filed for bankruptcy through May 31, according to Haynes and Boone. In the first two quarters of 2019, there were four oilfield service bankruptcies.

It will be an uphill climb to return to production. “The oil market has lost nearly all the momentum it gained in 2019 after COVID-19 lockdown mandates started sapping petroleum demand, especially that of transportation fuels,” Deloitte said.

“Significant resource impairments and asset write-offs are expected to hit the industry starting in Q2 2020,” the report said. “Our analysis suggests that impairments in 2020 would be close to 2015 levels” – the last period of low demand and low oil prices.

Competitive natural gas prices, a shift to renewable energy, which is now also price competitive and falling demand for motor fuels, as some workers shift to telecommuting and electric vehicles, will all provide strong headwinds for an industry rebound, Deloitte said.

The trend toward short supply chains and regionalized trade also play into a weaker market.

The quarterly survey of 56 shale oil exploration executives – in Texas, southern New Mexico and northern Louisiana – by the Dallas Federal Reserve Bank found that four out of five executives think it will take until 2021 or later for the market to rebound, while 16 percent thought it would never return to pre-COVID-19 levels.

On average, the executives expect a WTI prices of $42.11 a barrel by the end of 2020 (the range was from $22 to $65 a barrel).

Some companies – such as Parsley Energy, EOG Resources and Continental Resources – have said they are bringing shut-in production back online in the second half of the year.

Still, the Dallas Federal Reserve’s business activity index for the shale industry fell to -66.1 from -50.9 – the lowest reading in the survey’s four-year history.

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