Despite the hype of lower breakeven prices, and despite the hype around longer laterals, energy digitalization, and other technological breakthroughs, most shale companies are still not profitable.
In fact, roughly 9 out of every 10 U.S. shale companies are burning cash, according to Rystad Energy. The Oslo-based consultancy studied 40 U.S. shale companies and found that only 4 of them had positive cash flow in the first quarter of 2019. In fact, the number of companies with positive cash flow was lower than it was previously, and total cash flow from the group fell from $14 billion in the fourth quarter to just $9.9 billion in the first.
“The gap between capex and [cash flow from operating activities] has reached a staggering $4.7 billion. This implies tremendous overspend, the likes of which have not been seen since the third quarter of 2017,” Alisa Lukash, Senior Analyst on Rystad Energy’s North American Shale team, said in a press release.
U.S. shale drillers have historically loaded up on debt in order to continue to finance their cash burn. But investors have soured on the sector, finally waking up to the fact that shale drillers by and large are money losers. According to Rystad, no shale company has made a public offering since the collapse of oil prices last year, the longest stretch of time with no public capital issuance since 2014. “Recently released data, which confirmed dismal first quarter earnings, only served to cement negative market sentiment,” Lukash said. Investors are fed up and are “leaving no room for undisciplined spending in 2019.”
The financial position should improve in the second quarter Rystad said. Capex is supposed to be roughly flat, while higher production should improve cash flow. Related: China's Biggest Weapon In The Trade War
Smaller shale companies are in a particularly tough position. Even as investors demand capital discipline and an end to reckless spending, small drillers are unable to sit still because of the treadmill of declining shale wells. Rapid declines in output require constant drilling, which, if you are an unprofitable company, requires constant reinjections of capital. For years, that was not too much of problem as long as Wall Street kept the taps open.
However, financing is becoming less abundant as tightfisted investors become more demanding. Instead, in order to survive, small shale companies are under pressure to either grow their way out of the problem or find a buyer, Robert Kaplan, president of the Federal Reserve Bank of Dallas said in an interview with the FT.
While the early years of the shale revolution were characterized by countless small drillers, the industry is consolidating and the majors are increasingly taking over. Large companies have the advantage of being able to stomach years of negative cash flow. They also have easy access to capital markets, and they can use scale to their advantage, such as stitching together contiguous plots and using the same infrastructure for multiple drilling areas.
As investors sour on the energy complex, small mom-and-pop companies are having trouble finding financing. “Because if you’re going to have to drill upon drill upon drill upon drill to maintain just the same level of production, it’s expensive, and people are realising just to do that, I need scale,” Kaplan told the FT. Related: Oil Prices Plunge On U.S.-China Trade War Escalation
Yields on junk bonds for E&Ps jumped over the past month, rising from a little over 7.5 percent in late April to almost 8.5 percent in late May.
The latest company to throw in the towel was White Start Petroleum LLC, which filed for chapter 11 bankruptcy protection on Tuesday. The company was founded by the late Aubrey McClendon under a different name, American Energy Partners LP, shortly after McClendon was forced out of Chesapeake Energy. The company has been “stressed financially in recent years, partly due to low production volumes and higher-than-expected operational costs,” the Wall Street Journal reported. Ravaged by the collapse of oil prices in late 2018, the company stopped drilling new wells in April, the WSJ said.
WTI is back below $60 per barrel and, unless it rebounds, scrutiny on the entire sector is likely to pick up.
By Nick Cunningham of Oilprice.com
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