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How Debt Has Caught Up With U.S. Shale

How Debt Has Caught Up With U.S. Shale

Whiting Petroleum is the latest victim of the flawed U.S. shale play business model.

The shale and tight oil play model is based on large-scale acreage acquisition at any price and massive over-production to satisfy growth targets. In Whiting’s case, it also involved debt-based acquisition of Kodiak Oil and Gas, another large Bakken player. The $3.8 billion deal closed in December 2014 when WTI oil prices averaged $66 per barrel, down from $106 per barrel in June.

Whiting’s demise shows that location isn’t everything. The company is looking for a buyer despite having a premium position in the Bakken Shale play in North Dakota.

Whiting discovered the Sanish Field in 2006 that began the Bakken-Three Forks play and that has been the centerpiece of activity for the past several years. The map below shows Bakken commercial areas at $45 WTI oil price based on an average well EUR (estimated ultimate recovery) of 650,000 barrels of oil equivalent. Related: Fracking Big Upset: New York Residents Talk Secession


Bakken Shale map showing commercial area (in green) at $45 WTI oil price. Whiting wells are shown in red and Kodiak wells in yellow. Data from DrillingInfo, mapping by Labyrinth Consulting Services, Inc.
(click image to enlarge)

The table below summarizes Whiting’s financial performance. The company ended 2014 with free cash flow of almost negative $3 billion and 100% debt-to-equity ratio. The increase in debt from 3rd quarter 2014 was because of the Kodiak acquisition.


(click image to enlarge)

Whiting is typical of many U.S. independent shale players that operate on perpetual negative cash flow and increasing debt. Investors ignored the poor financial performance of shale players as long as oil prices were high. Companies claimed high per-well profit margins when oil prices were in the $95 per barrel WTI price range despite negative cash flow. Related: Oil Price Crash A Blessing In Disguise For US Shale

Capital flowed to these companies because they paid premium returns for debt and equity offerings, often in the 6-9% range. In a zero-interest rate world, these yields were irresistible because the investments were in the U.S. and backed supposedly by a hard asset in the ground.

When oil prices began to fall in mid-2014, the share price of these and most energy companies dropped. In late August 2014, Whiting stock sold for $93 per share but closed at $34 on Friday March 6, 2015. When asset values fall below certain thresholds, debt covenants are triggered so Whiting must find a way to satisfy these calls. Selling the company was apparently the only option.

Whiting is a harbinger of the future for companies with a similar business model as long as oil prices remain low.

By Art Berman for Oilprice.com

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Leave a comment
  • Gene Frenkle on March 09 2015 said:
    The great irony of all of this is that climate change believer Krugman gives credit to Obama for defending Bernanke's QE against conservatives that ended up fueling the FRACKING boom and perpetuating the fossil fuel economy!
  • Larry Shultz on March 10 2015 said:
    It took 5 years and literally $500-billion in Wall Street investor financing to finally realize that you can't pay your drilling and operating costs if you suffer annual oil production decline rates of 60%-80% and have an limited EUR ultimate recovery rate of less than 2%-7% of the oil in place!

    What Wall Street didn't know is that there is a much bigger and more profitable opportunity than shale in the oil industry: portable CO2 EOR, developed by http://FossilBayEnergy.com that can re-pressurize and revive oil production in old and abandoned oil fields that still contain millions of barrels of oil recoverable by use of CO2 EOR. See: http://oilpro.com/post/10072/replace-unconventional-shale-oil-production-portable-co2-eor-oil
  • Stephen on March 10 2015 said:
    How do you know that Whiting hasn't already received a decent offer, and is simply seeing what else is out there? They aren't really in a position of distress.
  • Vera Scroggins on March 13 2015 said:
    Good News for those of us who want gas drilling out of our neighborhoods and not next to our homes, on school properties, on farms where our food is produced ;
    Gas prices are down also and profits and I hope this leads to their demise and removal from industrializing our rural counties here in Pa. and elsewhere.
    We are enduring enough water contamination and air pollution from this industry in our back yards and negative health impacts...
  • Nick Kelly on March 14 2015 said:
    It's starting to look like shale was almost a financial hoax- were these guys ever having positive cash flow, or whatever the correct term is for profit.
    Or were they spending $10 to make 8 , then 7 and then the music stopped.
    It's hard to produce oil but is easy to produce shares. As long as the share price rises, who needs profit.
  • Perko on March 15 2015 said:
    See the point of about 31 minutes of this interview with Berman where he says 'the US could be energy independent if they reduced the amount of oil they consume by cutting back on driving flying etc...


    Art - you really don't get it do you.

    If the US cut back on the use of oil that would be bring on the collapse of the economy.

    It really is so simple I am astounded that you don't understand that.

    Cutting back means we consume less --- which means we de-growth --- which means millions get laid off --- which leads to a deflationary death spiral and collapse.

    Growth NEEDS fossil fuels --- so cutting back on their use means no growth.

    We have no choice --- we either continue to burn more fossil fuels every year --- or we collapse

    And before someone says 'but what about renewable energy' I will head that off:

    Renewable energy 'simply won't work': Top Google engineers


    Two highly qualified Google engineers who have spent years studying and trying to improve renewable energy technology have stated quite bluntly that renewables will never permit the human race to cut CO2 emissions to the levels demanded by climate activists.

    Whatever the future holds, it is not a renewables-powered civilisation: such a thing is impossible.

    Both men are Stanford PhDs, Ross Koningstein having trained in aerospace engineering and David Fork in applied physics. These aren't guys who fiddle about with websites or data analytics or "technology" of that sort: they are real engineers who understand difficult maths and physics, and top-bracket even among that distinguished company. The duo were employed at Google on the RE

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