OPEC may have reached a deal to cut 10 million bpd, but for many U.S. shale producers, it is too little, far too late.
Much ado has been made about Saudi Arabia and Russia’s push to end their cooperation in the production cut deal a month ago, flooding the markets with oil at a perilous time. While some have suggested that it was a deliberate attempt to break the U.S. Shale industry that has run roughshod over the oil industry in the last few years, upsetting the market balance of the oil cartel.
Both Saudi Arabia and Russia have outright denied the claim that is was a purposeful attack on the shale industry—a wise proclamation given shale’s fastidious ally, U.S. President Donald Trump, who has praised the shale industry that has served as the platform for America’s energy independence efforts.
Those efforts have been wildly successful by any measuring stick, and for that reason, shale will not be allowed to die no matter what Saudi Arabia and Russia dish out.
But that doesn’t mean that some of the weaker U.S. shale players won’t wither up and die along the way, drowning in extra crude inventory and debt, saddled with inefficiencies and a business that couldn’t make it at even $50 crude, and without the lifelines of increased oil demand or stimulus money.
For shale players in this category, your days are numbered—all signs point to this inevitable conclusion.
Colluding Against U.S. Shale
Whether you’re a believer in a free market system or a cartel that conspires to restrict production for the purposes of raising global oil prices, there is no denying that OPEC, and later OEPC+, have tried to push U.S. shale out of the oil market—without success.
In fact, OPEC and Russia’s production cuts backfired in a fantastic way, reducing OPEC’s market share and its clout—for every barrel they cut over the last few years, prices rose, paving the way for U.S. shale companies to lap it up eagerly and unapologetically. Even though U.S. shale players have significantly higher breakevens.
OPEC data source: OPEC MOMR, Russia Data Source: Y charts, U.S. production, EIA. Figures represent the change from October 2016, the baseline for the initial round of the production cuts that began in 2017.
But U.S. shale companies have already lowered their costs, digging deep to squeeze any efficiency gains they possibly could during the last oil price crisis. And while we may see this dedication to cost reductions in the shale patch again this time around, not every shale player will be successful.
The Bigger, the Better
While the larger shale players have more room to trim costs and spread those costs over more barrels, smaller companies are unlikely to be able to duplicate their efforts from the last crisis. Most of the easy efficiency gains have already been made.
And during the previous crisis, oil service providers were asked to shoulder much of the price pain by shale companies. This time around, service providers, who have been walloped themselves, causing them to tighten their belts, might not be so willing.
Halliburton is already cinching that belt with capex cuts, job cuts, and executive salary cuts. Baker Hughes cut its capex by 20% and took a $15 billion non-cash goodwill impairment charge. Schlumberger pulled the trigger weeks ago as well, reducing its spending by 30%.
But that hasn’t stopped shale companies from begging for breaks. Parsley Energy and Marathon Oil are two producers who have already asked service providers to reconsider their pricing.
Bankruptcies Were Already On the Rise
In the runup to the coronavirus crisis and the oil price war, oil and gas company bankruptcies were already on the rise. Bankruptcies increased by 50% in 2019, according to Haynes and Boone, and as of January 2020—well before the catastrophic oil market developments, they were already predicting increases in this figure for 2020.
There Goes the Budget
For shale producers that thought the latest OPEC deal would lift prices and save them, this has truly turned out to be a nightmare scenario. WTI is still hovering dangerously close to an unsustainable $20—when most shale producers have crafted their budget assuming WTI at more than twice that figure—some at triple that.
It seems some lessons that should have been learned in the 2014 price crash just didn’t sink in—the market has been nervous of lower oil demand for months, well before today’s crisis.
EOG Resources, EQT Corp, Whiting Petroleum, and more have already cut budgets in the wake of the lower prices.
U.S. shale producers are also saddled with massive debt—debt that they will struggle to make good on at $20 oil.
While integrated oil companies will find it a bit easier to breathe in the tight squeeze between oversupply and lack of demand, companies with heavy debt will struggle to stay afloat.
Occidental (NYSE: OXY), who took on $40 billion in debt when it acquired Anadarko last year, is likely bemoaning its decision now after it was forced to slash its dividend and found itself downgraded by Moody’s Investors Services to a shameful junk rating. It is that very debt load that is today “significantly compromising its financial flexibility to confront the collapse in oil prices,” Moody’s VP Andrew Brooks said last month, according to the Motley Fool.
And it is not alone.
Whiting, a major shale player in North Dakota, was the first large shale company to declare bankruptcy, suffering under significant debt.
Again, it seems that the shale industry, while resilient in many respects, failed to heed many analysts’ warnings that it was carrying far too much debt.
There is no doubt that every shale producer--whether they have hedged or not, whether they have restructured their debt or not, whether they have cut jobs and capex or not—will be put to the test in the coming months as the market waits to see the results from OPEC’s production cuts. But there is also no doubt that some shale players won’t survive.
By Julianne Geiger for Oilprice.com
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