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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Is The U.S. Shale Bankruptcy Rout Over?

Back in April, we reported that U.S. oil and gas companies were still filing for bankruptcy at record levels right in the midst of an oil price recovery. Smaller producers were the main victims as a total of eight North American oil and gas producers with an aggregate debt of $1.8B filed for bankruptcy protection in Q1 2021. But it now appears that the massive wave of bankruptcies has finally abated.

According to Energy and restructuring law firm Haynes and Boone, just four U.S. exploration and production (E&P) companies filed for Chapter 11 during the second quarter, bringing the tally for H1 2021 to 12, the lowest number in six years.

More importantly, there were no producers with billion?dollar bankruptcies during the quarter, the first time this has happened in 12 consecutive quarters. The aggregate debt tab of $1.8B by the four E&Ps that filed for protection ranks as the lowest amount since the first six months of 2015, when it clocked in at $3.6 billion.

The report for oil field services (OFS) was more mixed, with the number of filings low but aggregate debt high.

Haynes and Boone says eight OFS companies filed for Chapter 11 in Q2 2021 to bring H1 2021 numbers to 13 companies. The aggregate debt for the 13 companies came in at over $5.9 billion, the fourth-highest H1 total since 2015, with offshore driller Seadrill Ltd (OTCQX:SDRL) accounting for the lion's share.

Midstream oil and gas companies are usually the least bankruptcy prone, with just six filing for protection in a typical year thanks to many being subsidiaries of deep-pocketed integrated E&Ps. This trend continued during the second quarter with zero midstreamers filing for bankruptcy between April and June, thus bringing H1 2021 total to three.

Aggregate debt for the three midstream companies that filed for protection was $6.7 million,  the lowest H1 total since 2018 when it was $62 million.

Shale comeback

Oil prices have been trading sideways with the continuing spread of the coronavirus delta variant presenting a major wall of worry but reports that OPEC+ sees no need to release more oil into the market despite U.S. pressure being viewed as bullish.

Last week, the Biden administration urged the OPEC producers to raise production to ease rising gasoline prices which it views as a threat to full economic recovery.

But maybe Biden won't have to look beyond his own backyard for more oil production.

Related: Why The U.S. Is So Vulnerable To Rising Oil Prices

 Velandera Energy's Manish Raj has told MarketWatch that U.S. oil production has been slowly "creeping up and is now 300K bbl/day higher from the beginning of the year.

In its latest report, the International Energy Agency (IEA) has predicted that we could start to see a strong comeback by U.S. shale, with supply from non-OPEC producers expected to rise by 1.7 mb/d in 2022, with the US accounting for 60% of the growth. Baker Hughes' latest weekly survey found that the number of active, oil-targeted rigs in the U.S. jumped by 10 to a 16-month high of 397 rigs.

Indeed, Rystad Energy says the U.S. shale industry is on course to set a significant milestone in 2021: Record pre-hedge revenues.

According to the Norwegian energy navel-gazer, U.S. shale producers can expect a record-high hydrocarbon revenue of $195 billion before factoring in hedges in 2021 if WTI futures continue their strong run and average at $60 per barrel this year and natural gas and NGL prices remain steady. The previous record for pre-hedge revenues was $191 billion set in 2019.

The estimate includes hydrocarbon sales from all tight oil horizontal wells in the Permian, Bakken, Anadarko, Eagle Ford, and Niobrara.

However, Rystad says that whereas hydrocarbon sales, cash from operations, and EBITDA for tight oil producers are all likely to test new record highs if WTI averages at least $60 per barrel this year, capital expenditure will only see muted growth as many producers remain committed to maintaining operational discipline.

That means a lot of the excess cash will be going into paying down debt and also rewarding shareholders with more dividends and share buybacks.

By Alex Kimani for Oilprice.com

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