SEA OF RED: Majority Of U.S. Shale Companies Took A Beating Q1 2019

The overwhelming majority of U.S. shale companies were hit hard due to lower oil prices in the first quarter of the year.  Just about every shale company that I keep track of suffered negative free cash flows in Q1 2019.  This was quite a surprise as Rystad Energy claimed that the breakeven price for U.S. tight oil (shale oil) was the second lowest in the world at $46 a barrel, right behind Saudi Arabia at $42.

According to the U.S. Energy Information Agency (EIA), the average West Texas Oil price in Q1 2019 was $54.82, down from $60 in the last quarter of 2018.  However, even with receiving nearly $55 a barrel, the majority of U.S. shale companies posted negative free cash flows.  I was quite surprised when I researched the data.

As we can see in the chart below, sixteen of the leading U.S. shale companies posted a total of $3.2 billion of negative free cash flow:

Hess suffered the largest negative free cash flow at a negative $433 million, while Continental Resources was the “best of the worst” at -$32 million.  Here is the list of the companies shown above:

While it’s true that I did not include every shale company in the list above, it’s a pretty extensive group.  Furthermore, I did not include the free cash flow from the big three U.S. oil companies, ExxonMobil, Chevron, and ConocoPhillips as they still produce a lot of conventional and offshore oil. However, one shale company that I did not include in the list above was APC – Anadarko Petroleum.  Anadarko posted a negative $260 million in free cash flow in Q1 2019.

Regardless, we can clearly see that even at $55 a barrel, the majority of U.S. shale companies were still spending more money than they received from operations in the first quarter of the year.  Again, the total free cash flow of the group was a negative $3.2 billion.

NOTE: For those who don’t understand the term Free Cash Flow, the companies calculate that figure by subtracting total capital expenditures from cash from operations.  It’s important for companies to show “positive” free cash flow as they need the funds to grow their business, pay dividends, or buy back stock.  However, many shale companies listed above have suffered negative free cash flows for many years, which forced them to increase their debt or issue stock to fund business or grow production.

Unfortunately, due to the U.S. shale oil industry’s rapid decline rate, and negative free cash flows, many of these companies added a great deal of debt to their balance sheets to grow production over the past decade.  To service this debt, these companies pay a quarterly interest expense. According to the data taken from GuruFocus.com, these sixteen shale companies paid nearly $900 million of interest expense in just the first quarter of the year:

Thus, for the entire year, these shale companies will pay roughly $3.6 billion only to service the debt.  How much is $3.6 billion of interest expense in one year?   Well, that would purchase 65 million barrels of oil at $55 a barrel.  But, of course, these companies only pay a portion of each oil barrel to pay for the interest expense. If we assume $5 for each barrel for their interest expense, that will take 2 million barrels per day of oil production. That’s correct.  These shale companies need to produce 2 million barrels of oil per day for an entire year at $5 a barrel just to pay their interest expense.

It will be interesting to check the financial data from these companies in Q2 2019 as the oil price has recovered a bit and is up $7 a barrel more than it was in the first quarter.  So, the higher oil price should provide these companies more cash from operations.  I will do an update when the earnings are released at the beginning of the summer.

Lastly, higher oil prices will certainly allow the U.S. Shale Oil Ponzi to continue longer than lower oil prices.  However, if the U.S. and global economies head into a recession, then all bets are off as lower prices will likely pull the rug out from under the Shale Industry.

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Abe
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Abe

Oh my. This is not good at all. How long do they plan to stay in business while operating in the negative?
Only time will tell. Thanks Steve.

Rodster
Guest
Rodster

One thing that fascinates me and backs up what Gail Tverberg believes is that we are a point in history where the price of oil is TOO HIGH for the consumer and TOO LOW for the producers. Every time I see the price of oil keep inching higher it’s usually followed by economic headwinds and then the price of oil starts moving back down.

Unwillful dweller
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Unwillful dweller

That´s been the case for a very long time. If you think of it, after the 08/09 disaster, The powers that be have only cared for the supply side, hence the massive bailouts and free money ONLY FOR GOVERNMENTS AND BIG CORPS. The demand side was laid to waste, never recovered and never will. This is proved by the fact that oil prices tanked in 2015/16, mainly because oil output grew very fast, but demand was not there. Inventories skyrocketed and futures dropped like a rock. Now, oil demand comes mainly from Asia. China and India have overtaken what used… Read more »

You Know My Name
Guest

I know many people don’t want to hear this, but you have to look at the bright side: The shale debt is really just a drop in the bucket in the scheme of things. $3.2 billion in one quarter? Nothing compared to what we spend on other boondoggles. And with this we get something tangible and very useful. Look at all the jobs and revenue created – massive. I am willing to bet one thing: Spending the money or even wasting the money on shale HERE in the USA is probably much more economically advantageous than IMPORTING the oil from… Read more »

Hubbs
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Hubbs

In a rapidly expanding economy where all the stars had aligned after WWII- a homogeneous, young educated demographic, plentiful cheap energy and natural resources, the only show in town after the destruction of the rest of the world, fertile land, great momentum in the industrial revolution, health care, world reserve currency status, etc. it was not hard to outgrow any parasitic drag in the system. Now with the monsters of demographics, debt, and depletion(resources), there is little chance of rescue. Every little bit of nonproductivity or unprofitability is going to weigh onerously on us.

You Know My Name
Guest

Hubbs, Let me say, I basically agree with you. Also, I also agree with Steve’s analysis. However, my point is basically this: Is shale “unproductive”? No, it is certainly productive. Is it unprofitable? Depends on how you look at it. Even though it may be unprofitable for the companies involved, even though they are going into debt, is the production profitable for the over-all economy? I say YES! Even if it is produced at a loss, price-wise. Most countries in the world subsidize one industry or another. Why do they do it? Do they do it to loose money? No,… Read more »

Bernie
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Bernie

High oil prices and no new giant oil fields means the price will continue to rise. Oil shale is a political necessity to maintain global commerce. Otherwise oil would be over $100. When a primary resource is scarce only good money will buy it. Better have gold and silver.

jrs
Guest
jrs

Thanks for your continued coverage of this debacle.

I suppose the hamster wheel will keep spinning as long as there is a market for tight oil. How do these oilcos get financing? Are their debts packaged into securities and sold off to pension funds, etc looking for any favorable yield? I would bet the banks have off loaded the risk. If you can see it, they sure as hell can see it.

Bernie
Guest
Bernie

Oil shale is voodoo finance and the cash will ultimately be paid by the US Treasury. America has constructed a global economy based on the dollar and enforced by the military. The game is played to benefit those who sign on. Russia and China and others won’t allow the Empire’s “bases” on their territory which is a condition of subservience. Rising oil prices have split the system with Russia and it’s formidable military technology controlling the East. America represents both greed and an understanding of the need to elevate mankind beyond nationality and into humanity. It’s a stressful time. The… Read more »

Ryuji
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Ryuji

Pioneer Resources just laid off 230 workers on Tuesday. This was in addition to 300 workers cut in April. Can these companies even sell their shale oil at WTI price, or do they have to sell it for less, for its lower quality?

Brant Lee
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Brant Lee

Oil fell about $3 today 5/23/19…. That doesn’t help the situation. Even worse, because oil CAN fall 5% in one day is not a good sign. Financial markets are looking shaky and I don’t think it’s going to get better now.

Something about Oil
Guest
Something about Oil

Such an article really bothers me, as you pick and chose the data to fit your gloomy shale narrative. Your first chart shows EOG with a -$393M in FCF putting it in the same boat as most shale operator which are losing moving, and of course that perfectly fits your narrative. However, and please correct me if im wrong, but the way I see it, EOG was actually positive $55M in FCF for the quarter but spent a large amount on acquisitions which leads us to the to the -393M that you are showing. So what this tells us is… Read more »

Sylvain from France
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Sylvain from France

Hi, can you Steve indicate the share (percentage) of the US shale oil producted by these sixteen compagnies ? thanks