Energize Weekly, October 9, 2019
Despite a string of bankruptcies and red ink, the future for U.S. shale drillers is not bleak, according to Oslo-based energy analyst Rystad Energy.
“In a nutshell, we do not believe the recent bankruptcies that have beset a number of shale players are indicative of an industry-wide epidemic,” Alisa Lukash, a senior analyst on Rystad Energy’s North American shale team, said in a statement.
That is good news as many of the numbers for the sector have been bleak.
Through August, there were 26 exploration and production (E&P) oil company bankruptcy filings compared with 28 for all of 2018, according to the Haynes and Boone LLP Oil Patch Bankruptcy Monitor.
Among the top 40 shale operators, who account for half of all shale oil and gas production, two-thirds also had negative cash flow in the second quarter of 2019.
On top of that, those 40 drillers face about $100 billion in debt installments and interest over the next seven years, unless there is debt refinancing, according to Rystad.
Operators are facing interest payments of $2.6 billion to $5.1 billion annually, with maturity totals of about $71 billion between 2020 and 2026.
In the first half of 2019, the 40 companies generated $23.7 billion in cash flow from operations and spent $28 billion. Rystad calculated the outstanding debt at $112 billion and the combined enterprise value at $335.5 billion as of September.
“These numbers indicate a lack of financing to deal with the burden of the obligation,” Lukash said. “Given the low levels of external capital additions during the past 10 months, the probability of debt refinancing in the coming quarters seems relatively slim.”
The sector’s viability will rest on acreage restructuring, mergers and acquisitions, and operators better balancing production growth, spending and debt reduction.
The number of drillers posting positive cash flow more than tripled between the first and second quarter of 2019 to 35 percent as a result of more efficient operations and higher oil prices.
Rystad forecasts that U.S. shale production will peak at approximately 14.5 million barrels a day in 2030. The federal Energy Information Administration estimated shale oil production for 2018 at 6.5 million barrels a day.
“One should be careful about extrapolating on the basis of a few distressed companies,” Lukash said. “The peer group is very diverse both in terms of acreage quality and in capital efficiency.”
