The U.S. Shale Oil Industry is in serious trouble as its debt spirals higher due to its massive production decline rates. While the Mainstream media continues to put out hype that the shale oil industry can produce oil at $30 or $40 a barrel, the reality shows that it’s becoming difficult just to finance its debt.
Yes, it’s true. Many of the shale oil companies are bringing on new wells just to pay the interest on their debt. Now, this wasn’t the case back in 2008 when the U.S. Shale Oil Industry first took off as most of the shale energy companies held very little debt and paid a tiny percentage of their operating income to finance its debt.
For example, Continental Resources who labels itself as “America’s Oil Champion” is one of the larger shale oil producers in the Bakken Shale Oil Field in North Dakota. Before Continental Resources started to pour money into the Bakken, its total debt was $165 million, and its annual interest expense was a paltry $13 million in 2007:.
However, if we scan across the table above, we can see that Continental Resources paid $321 million in 2016 just to service its debt that has now ballooned to $6.5 billion. If we divide the $321 million interest expense by its $6.5 billion in debt, it turns out to be about an average 5% interest charges. Can you imagine paying nearly one-third of a billion dollars in an interest payment?
To get a better idea how bad the financial situation is at Continental Resources, let’s look at their Q2 2017 report:
You will notice that Continental Resources recorded a $29 million operating income loss in the second quarter. Unfortunately, they did not have the funds to pay their $72.7 million interest expense that quarter. We can also see in the first half of 2017, Continental Resources made an operating income profit of $48.1 million, but their interest expense was $144 million.
So…. what we have here is one of the larger shale oil producers in the Bakken that didn’t make enough operating income just to cover its interest expense. If the oil price does not rise to $70-$80, these shale oil producers are going to have difficulty paying their interest expense.
Now, the reason Continental Resources and other shale oil companies in the Bakken are in such financial distress is due to the information displayed in the graph below:
This chart shows the estimated net cash flows of the shale energy companies producing oil in the Bakken. The BLACK BARS represent the monthly net cash flows, and the RED AREA shows the cumulative negative free cash flow in the Bakken. According to energy analyst, Rune Likvern of Fractional Flow, he estimates the cumulative free cash flow producing oil in the Bakken from 2009 to the middle of 2016 was a negative $32 billion.
The graph above reveals to anyone who can do simple grade-school math is that producing shale oil in the Bakken came a huge loss. Because the energy companies couldn’t make a profit producing oil in the Bakken, they borrowed $32+ billion of investor money to continue drilling wells.
The main factor that is causing the utter failure of the U.S. Shale Oil Industry is the massive decline rates experienced in the different shale plays. According to the EIA- U.S. Energy Information Agency’s recent Drilling Productivity Report, the top five Shale Oil Fields (Basins & Regions) will suffer decline rates ranging from 71% to 88% in September versus their new production:
The Permian Region in Texas will lose 71% of its production in September, while the Niobrara will decline 75%, the Anadarko, 78%, the Bakken, 84%, and the Eagle Ford a stunning 88%. The average decline rate for these five shale oil plays will be 78% next month. That is one heck of a lot of oil. Again, these figures are compared to their new production in September.
NOTE: The EIA puts out a Drilling Productivity Report each month where they estimate what the decline rate and new production amount will be the following month.
Again, using the data put out by the EIA, here are the different shale oil fields declines in barrels per day:
These five shale plays are estimated to lose nearly 400,000 barrels per day of oil in September. If we multiply that by 30 days, it comes out to be a whopping 12 million barrels per oil. Again, that is in just one month.
However, these five shale oil fields will be adding more oil in September to offset what they lost in production declines. For example, even though the Permian will lose 158,000 barrels per day (bd) of production next month, they are forecasted to add 222,000 bd of new oil per day. Thus, the net result is an addition of 64,000 bd in September.
Unfortunately, the Permian Region is going to experience the same fate as the Bakken and Eagle Ford. Both of these shale oil fields peaked and will likely decline shortly after when investors realize they are throwing good money after bad. Here is the estimated oil production decline for the Permian in September:
Once the U.S. Shale Oil Industry finally peaks and declines, it could get really ugly. Also, when investors realize they will not be getting back their initial investment, we are going to hear a great big SUCKING SOUND of money leaving the Shale Oil Industry. Thus, rapidly falling investment means a massive reduction in drilling activity… and then a significant drop in shale oil production
As the world realizes shale oil production wasn’t even profitable at $100, few will be stupid enough to copy the “U.S PAY ME NOW, AND I WON’T PAY YOU BACK LATER” business model. It was a Ponzi scheme from day one.
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