If the rapid decline rate or the massive debt doesn’t destroy the U.S. Shale Industry, the finance costs most certainly will. The amount of interest expense the shale companies have paid to finance business and increase production is stunning, to say the least. But, the real problem for the shale industry, isn’t the interest expense that they have already paid, but the staggering amount owed in the future.
Actually, I was quite shocked by some of the figures I was coming across during my research. You see, many articles on the Shale Industry have focused on the tremendous amount of debt saddling the companies’ balance sheets. However, one surprising statistic that is not mentioned is the “Total Interest Expense” due on all this debt to maturity (or in the future).
While I have posted some graphs showing much much the shale companies were paying in interest expense each quarter or annually, I never considered how much their “Total Finance Cost” would be over the life of their loans (debts). For example, one company that I keep track of is Oasis Petroleum. Oasis has focused most of its drilling and production in the Bakken Field in North Dakota.
I believe Oasis is in real trouble because their stock price is very close to a critical $5.00 support level:
You will notice that Oasis was trading more than ten times its present value at $55 a share in 2014. Currently, Oasis is trading at $5.20 a share, and a significant-close below $5.00 on the monthly chart spells big trouble for the company. Last year, Oasis paid $159 million in interest expense just to finance its debt. Which is terrible news, because the company’s free cash flow was a negative $155 million in 2018. Thus, if Oasis did not have to pay this high-interest expense, it would have been free cash flow positive.
But, as I stated, you should see how much Oasis owes in total interest on its remaining debt:
(table from Oasis 2018 Annual Report, including my annotations)
Oasis owes a total of $2.04 billion in debt (senior notes shown at the top of the table). However, it’s total interest payment on this debt is $584 million, if held to maturity. So, Oasis is currently obligated to pay a total of 27% of interest on its outstanding debt over the next 5+ years. That is truly a remarkable figure just to finance its debt. How does Oasis plan to pay back it’s debt if it’s free cash flow has been a negative $1.5 billion over the past five years (2014-2018)?
And, if we add up all the interest expense that Oasis has paid since 2010, its nearly $1 billion. I decided to see what the total interest expense paid by 20 of the U.S. shale oil and gas companies over the same period. According to the data published by GuruFocus.com, the total interest expense paid by the following 20 companies since 2010 was a stunning $39 billion:
The figures in the chart are shown in millions. While we see Oasis (OAS ticker) paid $962 million in interest expense 2010-2018, the clear winner was Anadarko Petroleum (APC) at $7.4 billion. So, Anadarko is most certainly making some investors rich, for a while that is. Unfortunately, it’s highly unlikely that Anadarko will be able to pay back its debt, so investors chasing high yield, be prepared to lose a lot of your capital investment.
Here is a list of the companies names in order, used in the chart above:
(figures above are in millions)
While Anadarko paid $7.4 billion of interest expense to service its debt over the past nine years, do you have any idea how much they are obligated in the future? Well, it turns out to be a mind-blowing $13.5 billion of future interest on total borrowings:
(table from Anadarko 2018 Annual Report, including my annotations)
Of the total $17.6 billion in total borrowings, Anadarko’s total interest payment of $13.5 billion (held to maturity) equals an astonishing 77% of total debt. WOW! Of course, Anadarko could liquidate some of its debt sooner; thus, it would not have to pay the total $13.5 billion, but it will likely pay a large percentage of that figure.
Furthermore, you will notice that the majority of Anadarko’s debt is due after 2023. So, the company was quite clever to push back the debt as far as possible. This, of course, is a perfect example of SHALE PONZI FINANCE.
Again, many of the energy analysts are focusing on the tremendous amount of debt owed by the shale industry, but we can clearly see from the examples above, an essential factor not considered is the huge cost to finance debt in the future. While Oasis is currently obligated to pay 27% of its long-term debt in interest payments, Anadarko’s future finance costs are more than three-quarters of its outstanding debt.
So, what is the total of these 20 companies? You will have to stay tuned for a future article. However, if we assume that the average future interest expense percentage of total debt in the entire Shale Industry is roughly 30%, then of the $300 billion in debt estimated to be held by these companies, we are talking in the neighborhood of $90+ billion.
An estimated $90 billion just in future interest payments, nearly a third of the total outstanding debt.
It’s no wonder the U.S. Shale Industry is now in serious trouble. After the shale industry paid handsomely to investors to grow production over the past decade, what happens when production finally peaks??
Lastly, as Finance Costs are now Killing the U.S. Shale Industry, it’s only a matter of time before BUBBLE POPS.
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