Fracked Financials by Bob Donnan, Nov 11, 2019, Bob’s Blog
Low natural gas prices continue to cause layoffs and bankruptcies, with no short term end in sight. We’re also aware that most of the “sweet spots” in the Marcellus Shale have already been drilled out, so future production will be worse than past returns. We also know how stingy Marcellus Shale can be.
Headlines over the past five months tell the woeful tale:
Campbell County uses new law to help offset bankruptcy fees
November 8, 2019 – From Aug. 1, 2018, to Oct. 21, 2019, Campbell County spent $1,354,987 in legal fees in five bankruptcy cases in four states for taxes owed from 2015 through 2019. Between August 2018 and October 2019, the county fought to collect taxes in the bankruptcies of Vanguard Natural Resources, Alpha Natural Resources, Blackjewel and Cloud Peak Energy. Source
Chesapeake Energy plunges below $1 as survival in question
Nov. 6, 2019 – Chesapeake Energy collapses to 20-year lows, a day after it issued a going concern notice and warned it may not be able to outlast low fuel prices. CHK’s Haynesville shale asset is the most likely candidate for a sale, but “production (and value) is declining by the day as the asset has entered base decline,” says Tudor analyst Sameer Panjwani. Source
Calgary-based Houston Oil & Gas ceases operations, leaving almost 1,300 wells needing cleanup
November 6, 2019 – Another Alberta oil and gas company has closed its doors, leaving more than $80 million in estimated costs to clean up its remaining wells, pipelines and facilities. Calgary-based Houston Oil & Gas told the Alberta Energy Regulator (AER) last month that it was ceasing operations and no longer has any employees, according to court documents. Houston entered receivership last week. Source
TROUBLE AT MIGHTY EXXONMOBIL: Record Number Of Shale Wells While Permian Oil Production Remains Flat
November 5, 2019 – There’s trouble brewing in the U.S. largest oil company while most investors remain in the dark. ExxonMobil added a record number of wells in the Permian during the first three quarters of 2019, only to see the company’s oil production plateau. This is the BIG PROBLEM facing ExxonMobil and other oil companies trying to outrun the industry’s KILLER annual decline rate. Source
Encana HQ move to U.S. part of oilpatch ‘tragedy,’ says Cenovus
October 31, 2019 – Alex Pourbaix said the move announced Thursday is similar to announcements by some drilling companies to move rigs south of the border to pursue more active oilfields, and the exodus of foreign companies over the past few years from the oilsands. “I think this is a tragedy for Canada,” adding foreign companies have taken billions of dollars with them as they left the Canadian oilpatch. Source
Small U.S. oil and gas companies get cold shoulder from large banks
October 28, 2019 – The largest banking lenders to the U.S. oil and gas sector are becoming more cautious, marking down their expectations for oil and gas prices that underpin loans in a move expected to put further financial stress on struggling producers. Since 2018, the S&P 500 Energy Sector is the worst performing sector in the Standard & Poor’s 500, falling 18% against a 12.8% increase for the broader index, and many publicly-traded shale companies have done even worse. Source
Husky Energy confirms staff layoffs
October 22, 2019 – Calgary-based Husky Energy Inc. is confirming it is laying off staff but won’t say how many. The job cuts are reminiscent of a series of layoffs by Calgary oil and gas producers following an oil price crash in late 2014 that contributed to an estimated 110,000 direct and indirect jobs being lost through 2015 and 2016. Source
Oilfield Services Face Crisis As Shale Slowdown Worsens
October 21, 2019 – The first and third-largest oilfield service companies in the world saw their earnings hit in the third quarter due to the slowdown in U.S. shale drilling. Schlumberger took a $12.7 billion impairment charge related to its North American business, a rather dramatic write-down. “That just tells you the state of the North American onshore market being pretty poor.” Source
The late Aubrey McClendon’s Permian business merges with parent to avoid bankruptcy
October 18, 2019 – The Permian Basin business of the late shale pioneer Aubrey McClendon merged its assets with its parent company to avoid bankruptcy for now. Houston-based Permian Sable Resources said Friday it successfully merged its assets with its subsidiary American Energy – Permian Basin and paid almost $400 million in cash in a deal with creditors to cut back the company’s debt by $1.4 billion. Source
U.S. oil and gas jobs fall as drilling declines
October 15, 2019 – Employment in oil and gas support activities had fallen by 14,000 or 5% between its cyclical peak in October 2018 and August 2019. Since November 2018, the number of rigs drilling for oil has fallen by 176 (20%) and for gas by 51 (26%). Source
Has the U.S. hit peak shale oil? Output has gone from explosive to sluggish
October 15, 2019 – Money isn’t as plentiful for an industry that in the last decade burned through nearly $200 billion. Investors are restless. [Or terrified?] Returns haven’t matched rocketing production, with the S&P 500 Oil & Gas Exploration stock index losing 21% in the last 10 years, compared with a 177% rise in the wider market. Source
Halliburton lays off 650 employees in four western states
October 9, 2019 – Houston oilfield service company Halliburton laid off 650 employees in four western states from New Mexico to North Dakota as demand for drilling and hydraulic fracturing services remains week amid lackluster oil prices. Source
EQT set to announce layoffs
September 9, 2019 – EQT Corp.is preparing plans to lay off ~200 employees in a move that could happen sometime this week. The layoffs, which would mark the second round of cuts since January when ~100 workers were laid off, would comprise a large chunk of the ~800 employees at the Pittsburgh-based natural gas driller. Source
Oil and Gas Bankruptcies Grow as Investors Lose Appetite for Shale
August 30, 2019 – Bankruptcies are rising in the U.S. oil patch as Wall Street’s disaffection with shale companies reverberates through the industry. Twenty-six U.S. oil-and-gas producers have filed for bankruptcy this year. That nearly matches the 28 producer bankruptcies in all of 2018, and the number is expected to rise as companies face mounting debt maturities. Source
CNX lays off fewer than 50 employees
August 20, 2019 – CNX Resources Corp., a natural gas exploration and production company based at Southpointe, laid off some of its workforce last week. Source
Energy bankruptcies back on the rise in 2019
August 15, 2019 – This year has seen nearly 40 energy bankruptcies thus far with more on the way in the weeks and months to come. The biggest filings this year includes the oilfield services giant Weatherford International. Source
Bankruptcy filings by U.S. energy producers pick up speed: law firm analysis
August 14, 2019 – In the oilfield services industry, there were 10 bankruptcy filings so far this year, with Weatherford International Plc by far the largest. It filed in July, listing unsecured debts of $7.4 billion, according to the report. The remaining nine firms combined have debts with a total value of $205 million. Source
Natural gas driller lays off employees
June 12, 2019 – Range Resources Corp., one of the largest natural gas production companies in the region, laid off about 40 employees on Tuesday. The layoffs were spread between Range Resources offices in Pennsylvania and Texas. Source
Drilling, dollars & debt: Colorado’s oil and gas industry is leveraged to the hilt. What does that mean for the future? by Aldo Svaldi, November 10, 2019, Denver Post
A new and more severe ruler is on the throne in oil and gas country, and the state’s petroleum producers are bending the knee and doing their best to survive.
After years of handing shale producers fistfuls of money to grow production as rapidly as possible, Wall Street is demanding they operate more efficiently and cover their costs without heavy borrowing.
Basically, investors want producers to shift from spending more than they make and using debt to fill the gap to generating surplus cash and providing them a return.
“Free cash flow is king,” Jennifer Martin Samuels, vice president of investor relations at Denver-based SM Energy, declared this summer at The Energy Summit, an annual industry gathering.
…
The industry’s ability to achieve free cash flow is vital to the state economy, not to mention winning back the investors burned by years of underperformance.
And yet, the eight largest public producers active in Colorado have spent $27 billion more than they have made the past five years, according to financial numbers.
To fund the gap, they have borrowed or turned to equity markets. But capital is in short supply and oil prices are lower than where producers need them to be to keep growing production. Drilling activity will likely slow in the months ahead.
“The industry raised a ton of capital to expand U.S. production this decade with little to show for it,” said Blaine Rollins, lead portfolio manager of the 361 Macro Opportunity Fund in Denver.
For eight of the past 10 years, energy stocks as a group have underperformed compared to the S&P 500, with a discouragingly wide gap this year. An exchange-traded fund, ticker XOP, that tracks oil and gas producers in the U.S. is down 14% this year, while the larger S&P 500 is up 23%.
“Why would any equity investor be excited to invest in the space given the past results?” Rollins asked. [Jason Kenney & AIMCo?]
And lenders, while they haven’t slammed the door entirely shut, have become much stingier and more questioning.
“Banks and debt investors no longer want to throw good money after bad money until they see some light at the end of the tunnel. And with $50 oil and $2 gas, there is only darkness,” Rollins said.
A dark kingdom
Once upon a time, investors used to view shale drillers, like the ones operating in the Denver-Julesburg Basin, as exciting growth stories, in the genre of Uber and WeWork, which have also fallen out of favor.
… Whether or not the companies made money didn’t matter [How idiotic!] as long as they were growing, and that they did, converting the U.S. from a major importer of oil to a net exporter.
Starting in late 2014, oil prices dove from over $100 a barrel to under $30, altering the economics of the business.
Overextended players got knocked out and bankruptcies soared.
Yet lenders were willing to work with struggling borrowers and private equity investors stepped in to buy up leases and fund new firms, in the expectation prices would recover.
They extended a grace that has expired. It is hard to know precisely when investors gave up hope for a fairy tale ending, but the attitude hardened in a dramatic way last year, and the disdain only intensified this year.
… Short-term there are worries that trade disputes and slower growth will put downward pressure on global demand. Longer-term, there is a concern that the world’s shift to renewable energy sources will mean less demand for oil and gas.
And new oil keeps popping up from unexpected sources. Norway, Brazil, Canada and even Guyana, either nonplayers or past-their-prime players in oil production, are expected to put 1 million additional barrels onto the market this year and another million next year, The New York Times recently reported.
Even if oil prices somehow found a way to rise to $100 a barrel again, that would actually prove a curse, Johnson said, setting off a frenzy among shale producers that would lead to another collapse.
“$100 oil will lead to $20 oil,” she said.
… On the surface, it isn’t looking so good, despite lower production costs in the DJ Basin compared to other locations.
Using numbers from Bloomberg, The Denver Post analyzed the free cash flows for the eight largest publicly-traded producers in the DJ Basin over the past five years through June 30.
That group includes Anadarko Petroleum, now part of Occidental Petroleum; Noble Energy; Extraction Oil & Gas; PDC Energy; SRC Energy, which is merging with PDC; HighPoint Resources; Whiting Petroleum; and Bonanza Creek Energy.
As a group, the eight Colorado-focused producers generated $44.6 billion in cash from their operations after covering expenses. But they spent $71.6 billion on capital expenditures, with much of that going to drill new wells and boost production.
Over the past five years, the eight companies have run a deficit in free cash flow of $27 billion.
Private equity or stock offerings covered some of that gap, but much of it came from borrowing, not unlike consumers who turns to credit cards when the paycheck isn’t enough to cover their expenses and purchases.
The eight companies had $33.6 billion in long-term debt on the books as of June 30, up from the $31 billion held three years earlier in 2016.
When things started getting tight last year, some firms made ends meet by selling off holdings, the equivalent of hosting a garage sale. A run-up in oil prices earlier this year helped delay the day of reckoning.
But when prices failed to hold above the $60 a barrel range, producers responded by cutting back on drilling.
… Young exploration firms backed with private money are largely trapped and unable to go public or sell, Johnson said, which will make it harder to open up new areas.
Public companies that formed with the expectation of growing fast and selling out in three to five years are also stuck. And while merging two competitors together can lower costs and free up money, stock investors have punished many firms trying to escape that route.
In a rare expression of contempt, stock investors are driving down the share price of both buyers and sellers in oil and gas mergers.
Since PDC Energy announced a $1.7 billion merger with SRC Energy in late August, share values for both Denver-based companies are down about 16%. [Poor Ovindictive! Not looking good for Encana’s solution to run way to the USA and change name]
Occidental Petroleum, based in Houston, has seen its shares fall 35% since the company swooped in on April 24 and made a higher offer than Chevon had on the table for Anadarko. Now the company, under pressure from its investors, is taking a hatchet to its drilling budget, in part to help it pay down all the debt it had to take on to complete the $55 billion deal.
“Our intent is to cap our annual production growth at an average of 5% as we balance the vast opportunities in our portfolio with growing free cash flow,” Occidental CEO and president Vicki Hollub told analysts on a call Tuesday.
… What that means for its Colorado workers is uncertain, but it likely won’t be good. And Occidental plans to shave $600,000 off the cost from each well it drills in the DJ Basin, in part by squeezing concessions from the local contractors it works with. [Think of safety failures caused by that “shaving” and harms to communities and the environment!]
On the ground
Investors want management teams to buy back shares, pay dividends and lower their debt, even though low commodity prices make that hard to do. [A financial hell of their own making]
… HighPoint, formerly known as Bill Barrett Corp., has focused on paying down debt and its lender recently agreed to keep open a credit line with $299 million available.
Increasingly, it has shifted its focus from production growth to generating cash flow, and spun off enough cash in the third quarter to cover a more modest drilling program.
… Still, shares of the company are down by more than 70% in the past year. Valued at nearly $50 back in the summer of 2011 and $5.55 a year ago, HighPoint shares closed at $1.33 on Thursday, after a 9.9% pop.
As a group, the DJ Basin producers, not counting Anadarko, have seen their share values cut in half the past year.
Aside from the overarching market pressures, producers in Colorado will also have to deal with a sweeping overhaul in state regulations.
Local communities now have a greater say in drilling plans, and opposition in places like Broomfield and Commerce City continues to rise.
…
As part of its strategy, HighPoint focuses its drilling in rural areas, avoiding the opposition some Colorado producers are facing as they push into developed areas.
Because the company isn’t drilling as fast, it isn’t depleting its inventory as quickly. And compared to four years ago, HighPoint can drill a well for about half the cost, Crawford said. [compromising safety, health, environment?]
…
On a treadmill
Wells drilled in shale formations are different than conventional wells in that they offer a huge payout early on and decline rapidly, by as much as 65% to 80% after the first year.
Production eventually steadies, but at much lower levels. That early surge is good in generating cash flow upfront and in taking advantage of higher prices.
But it also means that producers have to keep drilling or face a big drop off in production.
One analogy that describes the situation is running on a treadmill, said Raoul LeBlanc, vice president of North American unconventionals at IHS Markit.
… Even if prices rise again, LeBlanc thinks producers won’t be so quick to pour money into expanded drilling programs, now that investors are much more demanding about getting a return.
Effectively, the shale boom is over. Long live cash flow.
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