Energize Weekly, June 5, 2019
U.S. shale oil drillers continue to “burn cash” as they operate with negative cash flows, and while bankruptcies in the sector have cooled with the rebound in oil prices, risks still remain, according to industry analyses.
An analysis of 40 shale companies by Oslo, Norway-based Rystad Energy, an independent energy consultant, found that in the first quarter of 2019, only four, just 10 percent, reported positive cash flow.
“When considering available cash for a potential stockholder payback, the majority of U.S. shale oil operators saw free cash flow to equity below zero in the first quarter,” Alisa Lukash, a Rystad senior analyst, said in a statement.
The recent norm for companies with positive cash flow from operating activities (CFO) had been 20 percent. CFO can be used to expand operations (capital expenditures or capex), reduce debt or return to shareholders.
Total CFO fell from $14 billion in the fourth quarter of 2018 to $9.9 billion in the first quarter of 2019.
“That is the lowest CFO we have seen since the fourth quarter of 2017,” Lukash said. “The gap between capex and CFO has reached a staggering $4.7 billion. This implies tremendous overspend.”
And while the wave of bankruptcies—which hit the sector with the collapse of oil prices starting in late 2014—has abated as oil prices increased, there are still companies at risk, said Haynes and Boone, LLP, a Dallas-based law firm. The firm publishes an “Oil Patch Bankruptcy Monitor.”
Between 2015 and 2016, there were more than 100 oil company bankruptcies, but by 2018, the number was down to 29. There have been eight this year.
“This downward trend in bankruptcy filings mirrored the upward trend in commodity prices over the last two years,” Haynes and Boone said. “However, natural gas prices remain depressed from historical highs and crude oil prices remain as volatile as ever.”
“The increase [in oil prices] relieves a lot of pressure on many oil companies that avoided bankruptcy but remain weighed down by the hangover of high leverage taken on before the 2015 price crash,” the law firm said. “Even with the relief in oil prices, some companies remain financially stressed and may not be able to avoid restructuring their debt through bankruptcy.”
Faced with negative cash flow, shale companies have used bonds to finance operations, but no U.S. shale company has made a public offering since the sharp fall in oil prices, Rystad said. Without additional funds, companies will be hard pressed to refinance debt or maintain capex.
A few indebted operators did issue bonds in March and April to cover outstanding obligations. But an increase in interest rates by the U.S. Federal Reserve and the perceived risks in oil companies are making for a difficult market.
“Recently released data, which confirmed dismal first quarter earnings, only served to cement negative market sentiment,” Lukash said. “While shale operators continue to focus on improving capital efficiency, investors are putting the industry under extreme pressure, leaving no room for undisciplined spending in 2019.”
Rystad is projecting a rise in oil prices in the second quarter of 2019, which will improve CFO and keep drilling activity “robust.”
When the shale boom began, it was fueled by debt financing, and many shale companies were heavily leverage. When prices collapsed, it set off a string of bankruptcies.
All told since 2015, 172 oil drillers have filed for bankruptcy involving about $98.5 billion in debt, according to the bankruptcy monitor. Texas led with 78 bankruptcy filings, followed by Colorado with 10, New York and Louisiana with seven each and California with five.
The majority of U.S, shale producers have moved to slightly reduce their long-term debt, paying down obligation near maturity, Rystad said.
“Larger diversified operators, which have multiple cash generating engines and are more resistant to volatile commodity prices, will be especially poised to open up to acquisition of new acreage,” Lukash said.