FINANCE COSTS ARE KILLING THE SHALE INDUSTRY

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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The Last Honest Man
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The Last Honest Man

Steve, I get phone calls every week from different oil, gas and/or helium companies to invest in their drilling Partnerships. Most all of the salesmen who contact me talk like they’re big time Dallas “JR Ewing’s” and that they’re the best at what they do and what a sure fire income stream investing with them would be (Yeah. I know. BS). Knowing the distress shale companies are in and the production decline in The Bakken for one, and the fact that at one time in the not to distant past, shale saved the US oil industry from pumped out conventional… Read more »

Oil Guy
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Great article, Steve. Great info and analysis. I agree with just about everything you say in the articles and I don’t see how anyone could question the general picture that you present. As to what comes from all this in the future, I believe that the debt created in fracking will NEVER be re-payed, simple as that. The debt will be rolled over, forgiven, socialized, inflated away, or the companies will be bailed-out, bankrupted, dismantled, or nationalized and the debt “forgotten”, and swept under the rug. Of course, there is no doubt in my mind that when the fracking bonanza… Read more »

Brant Lee
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Brant Lee

Wow. Is this the new corporate business model? Debt on Debt? Thanks for the hard work, Steve.

Curt Tyner
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Curt Tyner

Steve, thanks for all the great work I try to get as many of my friends as possible to see your work. Great stuff

Vogt
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Vogt

Ronald-Peter Stöferle, Partner and Fund Manager at the independent investment boutique Incrementum in Liechtenstein, explains why gold belongs in every portfolio and why the dollar will lose its status as the world’s leading currency in the long term. WirtschaftsWoche: Will the price of gold benefit in the long term from the Fed’s turnaround? Ronald-Peter Stöferle: The guiding rule is that the more expansive monetary policy, the better the environment for gold. The Fed and other central banks are currently performing a monetary U-turn. Within ten years they had scooped 18,000 billion dollars out of nowhere. They have thus offered the… Read more »

IslandTeal
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IslandTeal

Steve.. As always a very well written article. Between you and WolfRichter the data is incredible.

petedivine
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petedivine

The petro-Dollar is one of the primary supports for the U.S. Dollar reserve status. Over the last few years many petro exporting nations have exported their petroleum in bi-lateral trade deals which bypass the Dollar. Example: Russia exports oil and natural gas to China in exchange for Yuan. Via INSTEX, Europe is bypassing the Dollar in oil trade with Iran. In one of Steve’s previous articles he showed that global oil production grew by 11.6 mbd and that the U.S. and Canada contributed 90% of the oil growth. Excess U.S. / Canadian capacity was exported in Dollars. Meaning anyone interested… Read more »

JT Roberts
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JT Roberts

Good comment Pete

Don’t forget the EIA is listing the oil in thousands of barrels

So the monthly imports are 300,000,000.

Things could turn real bad fast.

Mike Shellman
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Mike Shellman

This is well done, Steve, and as a ton of shale oil debt matures the next 12 months, very relevant. Good work!

Vikash Tirkey
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Vikash Tirkey

Shale industry does not die because ethe establishment doesn’t want it to die. The world cannot afford high fuel price so money is being dumped in it to keep the price low. So money will keep pouring into the oil industry no matter what.

RBM
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Carlos
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……”We have extrapolated that a total of 28,000 tons of gold are stored in China”…..
And they have canned Unicorn Farts into Unlimited Energy too…….