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Billions In Debt Fall Due Soon For Shale Drillers

As the oil price downturn continues unabated, producers are hedging future production in order to lengthen their lifelines as March interest payments loom large.

February saw producers start hedging for the first time in months, hoping to lock in prices at $45 for the next few years—just in case.

According to Reuters, last Thursday, U.S. crude for December 2017 delivery fell more than 2 percent to $43.47 per barrel, partly due to producer hedging. WTI for 2017 rose up to $43.55 per barrel, compared to January’s record low of $37.38 per barrel.

Related: Storage Problems Could Cause A Rout In Oil Prices

Citing swaps data from the Depository Trust & Clearing Corp., Reuters noted that trading volume in over-the-counter oil swaps was more than five times higher than the past three days combined.

The renewed hedging comes as shale interest payments are due in March, and producers are under tough pressure to ensure they will be able to make good on their debts.

By the end of March, the U.S. shale industry will have a combined interest bill due of $1.2 billion—some 50 percent of that owed by companies that have junk-rated credit, according to Bloomberg. By the end of this year, $9.8 billion in interest payments will come due for the shale industry.

Some have already missed their payments, including a $21.7 million interest payment by SandRidge Energy Inc., and an $8.8 million payment by Energy XXI Ltd. SandRidge can apparently make the payment, but chose to make use of the 30-day grace period.

Related: Venezuela Raises Fuel Prices By More Than 6,000 Percent

A total of 48 oil and gas producers have declared bankruptcy in North America since January last year, leaving unpaid debts of some $17 billion, according to HaynesBoone law firm.

As of the beginning of this year, we’re looking at $325 billion in debt for American’s cash-flow negative producers, according to ZeroHedge.

And banks are getting a bit nervous because of all the pressure coming from investors who aren’t keen on the emerging default picture in the oil and gas industry—despite the fact that most banks’ overall portfolios only have 2-3 percent lending to this sector. The KBW Bank Index has fallen 16.7 percent since the 1 January 2016.

According to the Financial Times, America’s 60 leading oil and gas companies have $200 billion in debt—and counting.

Related: Activist Investors Crushed By Oil Crash

March will definitely be madder than usual—an unforgiving month that can apparently only be tolerated with more hedging on futures, even if it means locking in a dismal price of $45 for the next few years. It’s not a nice price at all; rather, it’s just a frayed lifeline.

For others, the lifeline is in share selling. Devon Energy Corp. is shooting for $1.3 billion through share sales that represent one-quarter more shares than originally planned, and at a 7.8 percent discount. Pioneer Natural Resources Co. earned $1.4 billion in January in a share sale, at least five others are doing the same, according to Bloomberg.

But the trap here is that if the hedging works, interest payments are met, and increased share sales prop up coffers, it could actually work to worsen the global supply glut, because that lifeline means more drilling.

By James Burgess of Oilprice.com

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  • Tim on February 24 2016 said:
    Okay, so drilling resumes, what happened to all of that temp. housing that has been ordered broken down, and has now been scattered throughout the country ? It took millions to build, package up, and send out. It will cost more to rebuild. Much of the infrastructure has not been completed, and there's some uneasy feelings in the oil producing counties as whether to continue, or put on hold. Yes, there is this thing called the Legacy Fund that can be broke into in 2017, fed by oil royalties, and you can bet there's some greasing going on as to where the allocations will be delivered. Either way, it's an industry that will continue to have to lick it's wounds from time to time as the waves continue to crash.

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