Economic peak shale natural gas and oil from yet another bank & Wall Street scam

[ “Shale drillers companies are struggling to pay $235 billion of high-yield, high-risk debt taken on during the past 3 years of the U.S. shale boom. Shale drillers have consistently spent money faster than they’ve made it, even when oil was $100 a barrel.” Bloomberg

It looks like both shale “fracked” oil and natural gas are economically peaking a few years before their geological peaks, both around 2020.  Conventional natural gas, half of it, peaked in 2001.  This is bad news, because electric power increasingly depends on natural gas to balance intermittent wind and solar (coal and nuclear plants can’t do this fast enough), provide peaking and medium and baseload power, while more and more coal and nuclear plants shut down.

There are so many articles about how this came to be, and the financial woes going back for several years, that this posted ended up being a mish-mash of excerpts from some posts, and then a growing list at the bottom. Meanwhile, many house and senate hearings have experts and congressmen bragging about 100 to 250 years of energy independence! They’ll claim they didn’t see this coming I’m sure.

In a presentation at the Ira Sohn Investment Conference on May 4, Greenlight Capital hedge fund manager David Einhorn revealed that:

  • Wall Street and banks are clearly incentivized to enable the frack addicts: they greased the skids by underwriting debt and equity securities that allowed them to garner billions in fees.
  • Large oil frackers spent $80 billion more than they got from selling oil.
  • It’s not clear if investors are furnished a clear analysis of the returns these companies actually generate.
  • Tight oil is not profitable even at oil prices of $100 per barrel.As oil prices rose, frackers should have been drowning in cash. But none of them generated excess cash flow, not even when oil was at $100 a barrel. In fact, the opposite was true.
  • Recently, oil prices have declined. Because the frackers have less revenue, they’ve been forced to cut Capex. Though they will continue to spend more dollars than they take in, production is no longer growing.  A business that burns cash and doesn’t grow isn’t worth anything. On the $36 of revenues per BOE [barrel of oil equivalent], Pioneer Natural Resources spends about $14 on field operating expenses and another $6 on corporate expenses. Subtract the historical $28 of Capex, and they lose $12 for every BOE developed. That’s like using $50 bills to counterfeit $20s.

Energy analyst Art Berman likewise found 25 shale oil  companies with a cumulative negative cash flow of  $67 billion over the last four years.

Rational investors would not buy stock in companies losing so much money with this much debt. But ignorant investors have billions of dollars in large mutual funds (i.e. 401K, IRA, or taxable). Greedy investors in high-yield junk bond funds also keep the bubble going. The public risks losing a lot of their savings in the next financial crash and most of them don’t even know it.

The belief in our “energy independence” has already started a transition from coal to natural gas power generation, increasing numbers of truck fleets running on CNG and LNG, and $95 billion dollars of new petrochemical, fertilizer, and other businesses with plans to relocate from overseas or expand/build new factories in America to benefit from cheap gas prices.

The Congressional record of house and senate committee meetings is full of talk about “energy independence” and ridicule about “peak oil” because of a great deal of testimony is from energy production companies and the Energy Information Administration telling them that we have a 100-year supply of U.S. oil and gas,  and that we should export some of it to Europe to reduce Russian influence.

This has led me to thinking we need an Energy jester. Kings used to have a Fool who was the only person that could tell the King the Truth without having his head cut off.  What we need is an Energy Fool who will tell political leaders that both U.S. and global oil, natural gas, and coal may not be as abundant as they appear.  The fool can even cite peer-reviewed scientific literature.  Since only 1% of political leaders have a scientific background, that wouldn’t make a difference on energy or any other topic, another reason we find ourselves on the edge of a cliff.  Or perhaps already falling like Wily Coyote with legs wheeling in the air as the roadrunner speeds off to safety…

The consumption of this possibly imaginary 100-year supply of natural gas is expected to be 60% higher in 2030 (and more if we export LNG). But wait! That would cut the 100-year supply to 50 years or less (exponential growth is key to understanding the energy crisis).

Many experts (Berman, Hughes, Powers, Heinberg) expect the geological peak of shale oil and gas in 2019 or sooner. Economically it could be now, in 2015, if the enormous debt companies have racked up drives them out of business, lowers production, or stops them from expanding production.

In “Drilling Deeper”, Hughes shows that oil plays decline 60 to 91% the first 3 years and 1400 wells are needed in the Bakken just to keep production FLAT. EVERY YEAR.  From the sweet spots in 4 of 15 counties with the highest amount oil/gas.  Hughes thinks the 2012-2040 total oil production will be 13.9 billion barrels, 72% of the EIA estimate of 19.2 billion barrels.  And that shale gas production will be 39% less than the EIA 2040 prediction, dropping to 33% of the EIA’s forecast production rate in 2040.

Alice Friedemann  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts:  KunstlerCast 253, KunstlerCast278, Peak Prosperity]

June 18, 2015. The Shale Industry Could Be Swallowed By Its Own Debt by Asjylyn Loder. Bloomberg.

Drillers’ debt ballooned to $235 billion at the end of the first quarter, a 16% increase in the past year, even as revenue shrank.

Shale drillers have consistently spent money faster than they’ve made it, even when oil was $100 a barrel.

Credit markets have played a big role in keeping the entire sector alive,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd., a consulting firm in London.

The debt that fueled the U.S. shale boom now threatens to be its undoing. Drillers are devoting more revenue than ever to interest payments. S&P lowered the outlook or downgraded the credit of almost half of the 105 U.S. exploration and production companies that it rates, according to a May report.

Continental Resources Inc., spent almost as much as Exxon Mobil Corp., a company 20 times its size. Continental borrows at cheaper rates than many of its smaller peers because its debt is investment grade. S&P assigns speculative, or junk, ratings to 45 out of the 62 companies in the Bloomberg index.

Interest payments are eating up more than 10% of revenue for 27 of the 62 drillers in the Bloomberg Intelligence North America Independent Exploration and Production Index, up from 12 a year ago. Oil and gas companies accounted for one-third of the 36 corporate-debt defaults worldwide this year, and missed interest payments are the leading cause of default.

The question is, how long do they have that they can get away with this,” said Thomas Watters, an oil and gas credit analyst at Standard & Poor’s in New York. The companies with the lowest credit ratings “are in survival mode,” he said.  The companies in the Bloomberg index spent $4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year earlier, while pushing U.S. oil production to the highest in more than 30 years.

Almost $20 billion in bonds issued by the 62 companies are trading at distressed levels, with yields more than 10 percentage points above U.S. Treasuries, as investors demand much higher rates to compensate for the risk that obligations won’t be repaid.

Companies have reduced spending to cope with lower prices, but those cuts will eventually lead to production declines, further shrinking revenue, Watters said.

Interest expense can drain a company’s finances. At this time last year, Quicksilver Resources Inc. was spending more than 20% of its revenue on interest. The company missed a debt payment in February and has since filed for bankruptcy. Sabine Oil & Gas LLC missed an interest payment in April and another this month.

Jan 6, 2015. Deep Debt Keeps Oil Firms Pumping Producers Have Increased Their Borrowings by 55% Since 2010 By Erin Ailworth. Wall Street Journal.

American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion. Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June. But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing.

March 17, 2015. Quicksilver Resources Files Bankruptcy as Gas Price Drops, by Tiffany Kary, Bloomberg.

Natural gas producer Quicksilver Resources Inc. sought bankruptcy protection $1.21 billion in assets and $2.35 billion in debts, following a February warning that they wouldn’t pay interest on $298 million of bonds maturing in 2019. In addition to the 2019 notes,  the company also has $350 million in notes due 2016, $325 million in notes due 2021, and $200 million in notes due 2019, according to the filing. The notes due 2019 and the notes due 2021 closed at 4 cents in New York, down from $2.49 a year ago.

Dune Energy Inc., an oil and gas explorer, and Cal Dive International Inc., a provider of manned diving services for the offshore oil and gas industry, also filed for bankruptcy protection this month.

May 20, 2015. “Shale-ionaires” Suffering from Wave of Bankrupt Oil Drillers by Kelly Gilblom. Bloomberg

At the height of the U.S. energy boom, Texas landowner John Baen received about $100,000 a month in royalty payments from companies producing oil and natural gas on his property. Now the checks are much smaller, and so far, 4 of the producers sending him checks have caved in to rising debts as oil prices slumped, seeking court protection from their creditors. For many smaller, cash-strapped producers, current prices of almost $60 still aren’t enough to make ends meet compared to the $100-plus prices seen during the boom days.

There have been at least a dozen bankruptcy filings in recent months, and more than a dozen have defaulted on bond payments or warned investors of challenging times ahead, according to data compiled by Bloomberg.

Royalty payouts from bankrupt operations have shrunk to a fraction of the rates paid before the crash and landowners can be left with no one to take responsibility for abandoned waste, spills and other hazards, say industry experts who have past experience with oil busts.

Many more companies, which make monthly royalty payments to tens of thousands of people, may go bankrupt in the next year, said John Castellano, a managing director at AlixPartners LLC, who focuses on company restructuring.  “We’re seeing highly-levered companies, with high break-even cost requirements, with little ability to generate cash and little access to liquidity — I don’t believe we are near the end of this”.

WBH Energy Partners LLC is typical of companies seeking court relief from debts.

May 4, 2015. Shale Oil Drillers Plunge After Einhorn Slams Fracking Costs by Joe Carroll. Bloomberg

Money manager David Einhorn slammed the shale drilling industry that ushered in a new era of U.S. oil production as wasteful, expensive and a terrible investment. “Pioneer Natural Resources Co., burns cash and isn’t growing, why is the market paying $27 billion for this company?

Einhorn also singled out Concho Resources Inc., Whiting Petroleum Corp., EOG Resurces, and Continental Resources Inc. as examples of shale explorers that spend too much and generate too little cash.

March 31, 2015. Shale Producer Samson Says Bankruptcy May Be Best Option by Bradley Olson. Bloomberg

Samson Resources Corp., an oil and natural gas producer controlled by private equity giant KKR & Co., warned investors that bankruptcy may be its best option. Filing for Chapter 11 protection “may provide the most expeditious manner in which to effect a capital structure solution,” the Tulsa, Oklahoma-based company said Tuesday in its annual report.

Samson told investors it’s at risk of defaulting on its debts, saying its financial condition raises “substantial doubt” that it can continue as a going concern, according to the filing. Samson’s $2.25 billion of 9.75% notes due in February 2020 dropped to a record low of 21.7 cents on the dollar.

Other producers including Dune Energy Inc., BPZ Resources Inc. and Quicksilver Resources Inc. have also sought bankruptcy protection as a rapid decline in oil prices has led banks to rein in lending, drying up cash for drilling across North America.

March 24, 2015. Driller That Skipped First Bond Coupon Said to Start Debt Talks by L. J Keller. Bloomberg 

American Eagle Energy Corp., the Colorado oil producer that missed the first payment on $175 million of bonds it sold last year, has asked creditors to enter confidential debt-restructuring talks and discussed a potential bankruptcy filing as part of the restructuring plan.

American Eagle, is among energy companies now struggling to service $120 billion of high-yield, high-risk debt taken on during the past 3 years amid the U.S. shale boom.

Since oil prices peaked in June, average borrowing costs for the riskiest companies have more than doubled, data compiled by Bloomberg show.

Natural gas driller Quicksilver Resources Inc. and oil explorer BPZ Resources Inc. — two energy companies that missed interest payments this year — filed for Chapter 11 bankruptcy protection earlier this month. Plunging crude prices have also sent offshore contractor Cal Dive International Inc. into bankruptcy court.

The company’s 11% notes due September 2019 have lost more than two-thirds of their value since they were issued, costing investors more than $117 million. The notes last traded March 18 at 32 cents on the dollar. American Eagle’s debt is 1.3 times higher than what its enterprise value suggests the company is worth. American Eagle said it will write down assets by about $79.4 million because of falling energy prices, according to a March 16 regulatory filing.

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