U.S. shale companies could be forced to write down $300 billion of their assets this year, starting in the second quarter, as operators begin to account for the oil-price collapse on their balance sheets, according to a new study.
The huge impairments—about half the net value of the companies’ property, plant and equipment—would increase the sector’s leverage from 40% to 54%, triggering insolvencies and restructuring, says the study by Deloitte, an accountancy.
“As COVID-19 impacts amplify pressures on shale companies through 2020, a wave of impairments may prompt the deepest consolidation the industry has ever seen over the next six to 12 months,” said Duane Dickson, vice-chairman of Deloitte’s U.S. oil and gas business.
The writedowns, based on an oil price of $35/bbl, would be another blow to a sector that has been hammered by the worst oil-price crash in decades. U.S. crude output has plummeted as operators shut wells, idle rigs and sack oilfield workers.
Rystad Energy, a consultancy, calculated that shale producers’ impairments in the first quarter were about $38 billion.
By the end of May, 18 E&P companies had declared bankruptcy this year, according to Haynes and Boone, a law firm. Denver-based Extraction Oil & Gas Inc. recently joined the list. Chesapeake Energy Corp., an early shale pioneer, is likely to follow soon.
At a U.S. oil price of $35/bbl, almost a third of shale producers are insolvent, reckons Deloitte—unable to meet longer-term liabilities from free cash flow.
The U.S. oil benchmark was trading at about $40 on June 19, but has averaged less than $27 this quarter. In April, it briefly traded below zero, sending shockwaves through a shale patch that, on average, needs about $45 to turn a profit.
Consolidation is likely. But Deloitte thinks only 27% of shale companies would offer enough value for buyers. And only large independents or supermajors such as Chevron Corp. and Exxon Mobil Corp. still have the financial strength to make acquisitions.
RELATED:
Report: Supermajors Unlikely Acquirers of Distressed E&Ps
The sector’s vulnerability stems from the fast rate at which shale production declines, meaning new wells must constantly be drilled to replace fast-falling output at other ones.
“You’re on a capital treadmill just to maintain your production and that treadmill moves very fast,” said Scott Sanderson, a principal in Deloitte’s Houston office.
Soaring output in recent years depended on Wall Street’s willingness to keep funding that treadmill with new capital.
“The boom in fracking was largely financed by debt,” said Mohsin Meghji, head of M-III Partners, a restructuring adviser working with some bankrupt shale producers.
But investors have now soured on shale. Wall Street is unlikely to fund a new recovery or pay for the consolidation analysts say the sector needs.
“There was a sense that capital markets were going to dry up,” even before the crash, said Sanderson said. “Now the window is completely closed.”
Recommended Reading
Despite 2Q Earnings Miss, Kinder Morgan Plans Gas Capacity Growth
2024-07-18 - Kinder Morgan's second quarter earnings fell short of expectations due to recent low gas prices, but remains bullish on natural gas demand and is moving ahead on projects in the Southeast U.S. and Williston Basin.
Electrification Lights Up Need for Gas, LNG
2024-09-20 - As global power demand rises, much of the world is unable to grasp the need for gas or the connection to LNG, experts said.
Texas Needs More Natgas Pipes as Prices Turn Negative Again
2024-07-31 - Spot gas prices for July 31 at the Waha hub in West Texas turned negative for a third time in July even as a record-breaking heatwave could boost U.S. power demand to an all-time high later this week as homes and businesses crank up their air conditioners.
Analyst: Could Permian Gas Pipelines Fall Short of LNG Sweet Spot?
2024-09-23 - Permian Basin oil producers will be elated to see the Matterhorn Express and another planned pipeline move gas out of their way — but both will terminate east of the biggest LNG market in the world.
Energy Transfer’s Warrior Shrugs Off Newly Announced NatGas Pipeline
2024-08-08 - Energy Transfer said the July 31 announcement of the new Permian Basin Blackcomb natural gas pipeline will have “zero” effect on its Warrior Pipeline.
Comments
Add new comment
This conversation is moderated according to Hart Energy community rules. Please read the rules before joining the discussion. If you’re experiencing any technical problems, please contact our customer care team.