TROUBLE FINANCING ITS DEBT: Massive Decline Rates Push U.S. Shale Oil Industry Closer Towards Bankruptcy

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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28 Comments on "TROUBLE FINANCING ITS DEBT: Massive Decline Rates Push U.S. Shale Oil Industry Closer Towards Bankruptcy"

  1. Virginia. In eastern Oregon | August 24, 2017 at 5:52 pm |

    C/O SRSrocco Report, PO Box 1911, Beaver, UT. 84713

  2. rich forrest | August 24, 2017 at 6:50 pm |

    Steve: Question

    Continental has a 6 month accumulated Depreciation and Amortization expense of $777 million. D&A is a non cash item and, in this scenario, dwarfs the interest expense. Wouldn’t it be more useful to look at a statement of cashflow rather than the P&L.

    • rich forrest,

      You bring up a good point. However, if you go to my previous article here: https://srsroccoreport.com/continental-resources-example-of-what-is-horribly-wrong-with-the-u-s-shale-oil-industry/, you can read all the details on just how bad the financial situation is at Continental Resources.

      Regardless, if we look at Continental’s quarterly report, they made $446 million in operating cash in Q2 and spent $490 million CAPEX. So they suffered a negative free cash flow of $44 million. If we look at the first half, Continental enjoyed a small $37 million in positive free cash flow. So, if we apply a $144 million interest expense for the first half towards the $37 million free cash flow, Continental still came $100+ million short on their interest expense payment.

      steve

      • Looking over Continental’s past few years, the decline rates on crude production are stunning. From $4.11 billon in crude sales in 2014 to some $2.03 billion for 2016 …a 50% loss in 2 years. Is that the fracking hydrocarbon decline rate in $ and cents? 50% in two years?

        Upon thinking about the situation, I believe I can see the problem. Shale “plays” are just that …shale host rocks…. very tight rocks that will not yield hydrocarbons (HC) by perforated pipe migration unless “induced”, by additional permeability supplied by the “Frack”. As such, normal fields can be viewed as “traps” whereby oil migrates all by itself…. hence can last years or even decades through continual, albeit diminishing, rates of HC migration and replenishment.
        Not so with fracking. One can only fract so far from the drill stem, hence the field of HC migration in these tight but not fractured rocks is rather quite limited unless additional fracking is done regularly with likely rapidly diminishing returns. Frack wells do seem to be “short-lived” just by the nature of the beast. A short play seems to be indicated here.

    • Another interesting article Steve, given what we know of the overall profitability of the USA shale business model and its fundamental reliance on debt for sustainability, is the DD&A non-cash item being used to ‘squirrel’ real eye watering operational costs which if transparent would raise immediate questions to even the most casual of their $33 per share investors? A useful addition might have been to include reference to the board of directors renuneration packages, I know I’d do everything I could to keep hold of those increadible bonuses for as long as possible because of my self evident value to the company…😃

    • Let me assist in that question: upon the sales of assets, depreciation and amortization taken over the life of that asset requires that taxes be paid. In other words, these factors affect the CURRENT tax bill of the company. So when these companies go tits up, and they are sold at a discount …. a massive discount, this tax burden will be factored back into the equation. So in other words, all this line item on their balance sheet represents is a deferred tax liability.

      These companies, much Like the US of A are this: Bankrupt. The only thing they have going for them is this: CONFIDENCE.

      That will end!

  3. Conventional Oil Peaked in 2006 –IEA
    http://imgur.com/a/uCz7V
    https://www.scientificamerican.com/article/has-peak-oil-already-happened/

    New Oil discoveries by scientists have been declining since 1965 and last year was the lowest in history –IEA
    http://imgur.com/a/W60yn

    We have been draining our oil reserves by consuming more oil than we discover since the 1980’s
    http://imgur.com/a/uJ0Rg

    Saudi Arabian oil reserves are overstated by 40% – Wikileaks
    https://www.theguardian.com/business/2011/feb/08/saudi-oil-reserves-overstated-wikileaks

    International Energy Agency Chief warns of world oil shortages by 2020 as discoveries fall to record lows
    https://www.wsj.com/articles/iea-says-global-oil-discoveries-at-record-low-in-2016-1493244000

    Saudi Aramco CEO believes world oil shortage coming despite U.S. shale boom
    http://www.foxbusiness.com/markets/2017/07/10/saudi-aramco-ceo-believes-oil-shortage-coming-despite-u-s-shale-boom.html

    UAE warns of world oil shortages ahead by 2020 due to industry spending cuts
    http://www.arabianindustry.com/oil-gas/news/2016/nov/6/more-spending-cuts-as-uae-predicts-oil-shortages-5531344/

    Halliburton says oil will Spike due to shortages by 2020 After $2 Trillion in Industry Cuts
    https://www.bloomberg.com/news/articles/2017-07-12/halliburton-sees-2020-oil-spike-after-industry-cuts-2-trillion

    Wood Mackenzie warns of oil supply crunch and world oil shortages around 2020
    http://oilprice.com/Energy/Crude-Oil/The-Next-Oil-Price-Spike-May-Cripple-The-Industry.html

    HSBC Global Bank warns 80% of the worlds conventional fields are declining and world oil shortages by 2020
    https://www.research.hsbc.com/R/24/vzchQwb

    UBS Global Bank warns of industry slowdown and world Oil Shortages by 2020
    http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/12136886/Oil-slowdown-to-trigger-supply-crisis-by-2020-warns-bank.html

    MarketWatch : Why investors’ should brace for a devastating oil shortage ahead around 2020
    http://www.marketwatch.com/story/why-investors-should-brace-for-a-devastating-oil-shock-ahead-2017-07-03

    German Government (leaked) Peak Oil study concludes: oil is used directly or indirectly in the production of 90% of all industrial goods, so a shortage of oil would collapse the world economy & world governments/democracies
    http://www.spiegel.de/international/germany/peak-oil-and-the-german-government-military-study-warns-of-a-potentially-drastic-oil-crisis-a-715138.html

    The Oil Age may come to an end for a shortage of oil. -Saudi Oil Minister Sheikh Yamani

  4. There are two possibilities, in my opinion, when the age of oil ends.

    1.) Collapse, chaos and death of our species

    2.) Controlled depopulation (afterwards: iron boot stamping on a human face — in perpetuity. Aka feudalism improved by modern technology.

    • OutLookingIn | August 24, 2017 at 9:25 pm |

      It took mankind 200,000 years to populate the world with 1 billion human beings.
      It has taken only 200 years to push this population to almost 8 billion people.
      Why the sudden spike in world population?
      Coal and steam power, then oil and petroleum engines. Industrial revolution.

      The bio-mass energy of the world comfortably supported a population of 1 billion.
      Could maybe support another half million or 2 billion. No more than that.
      The end of the oil age will spell the end of the oil population surplus.
      Possibly up to 6 billion people will perish. Unless some new magical energy source is pulled out the hat along with the rabbit!

      • I reckon overpopulation is a great load of BS! Cities might well be overpopulated BUT not the world.

        Our population/s would be sustainable if it were not for the BANKS, POWER and GREED follow! If the world population rises to 9 or 10 billion, aging populations and low birth rates will ensure it is much lower by the turn of the century.

        And besides I can guarantee you this; “I won’t be here” 🙂 and neither will the lunatics who run this fear campaign!

  5. Paul Revere2020 | August 24, 2017 at 9:20 pm |

    Don’t worry there are smart people working in our Government they would create a false flag to invade other oil producing countries before we run out of oil.

    • Paul Revere2020,

      The U.S. has been invading other countries for their oil for decades. The problem is that the situation in other nations is becoming just as bad as it is in the United States. Furthermore, we don’t have the military capability that most believe. The Russians now have technology that can make any Ship, Tank or Plane worthless by its jamming technology. They have done it already. But it didn’t make the news.

      steve

      • And I might add, they don’t invade for the oil directly…they aren’t that honorable. They invade to protect the value of the US dollar and defend it’s “oil backing”.

  6. Paul Revere2020 | August 24, 2017 at 9:21 pm |

    Every major monthly US government economic report – employment, GDP, inflation – is little more than a fraudulent propaganda tool used to distort reality for the dual purpose of supporting the political and monetary system – both of which are collapsing – and attempting to convince the public that the economy is in good shape.

  7. Steve,
    Thanks for sharing your concerns on debt servicing.
    Could you pls elaborate how you’ve arrived to production decline numbers? 84% for Bakken, for example. I’m looking at EIA report https://www.eia.gov/petroleum/drilling/pdf/bakken.pdf (53K decline from legacy wells, same number) but my school-grade math suggest Aug to Sep drop is 5.1% of the total production – is still pretty steep decline; for conventional wells it would be an ~annual one.
    Do you mean first year decline on a new wells, perhaps?
    Nice visualization here: https://shaleprofile.com/index.php/2017/08/14/north-dakota-update-through-june-2017/
    thanks already!

    • Daniel,

      Yes, the decline rates that I calculated are not based upon the Shale Oil Fields total production minus their monthly decline. As you stated, that would be far less. However, I took the EIA’s data for each shale oil fields monthly decline and divided it by the new production.

      For example, the Eagle Ford is now suffering a 103,000 bd monthly decline but added 117,000 bd of new production. The companies drilling and producing oil in the Eagle Ford aren’t making any money. Thus, without investor inflows, CAPEX spending would decline. If no new production was added to the Eagle Ford, we could see a huge drop of 1 million barrels per day of production in just one year.

      I see this happening at some point as the oil price continues lower. I believe we are going to see a severe drop-off in U.S. shale oil production within the next 2-3 years.

      steve

      • Steve,
        84% decline for the first year is not unheard of but definitely not on a monthly bases. Decline does flattens in later years (controlling drawdown helps to reduce decline and increase recovery; opening wells to full choke to impress investors proven to hurt productivity and EUR).
        Game is to recover investment in a first few years – this probably never happens for wells drilled before price collapsed; your argument companies doing it now to stay afloat may be valid.
        If no new wells are added – production will drop off fairly fast, however operators claiming they can make money at <$50/bbl oil.
        Dividing cumulative production decline by new production should not be called decline, in my view. It is sort of "production replacement ratio" but as more new wells are added, total decline curve is getting steeper and steeper – look at "projected production" here: https://shaleprofile.com/index.php/2017/07/28/projecting-us-shale-oil-production-after-december-2016/
        Same source suggest Continental will produce 218MMbbl – this is about $30/bbl of $6.5B outstanding debt. Quite tight, considering they will have operating expenses, royalties etc.
        Sad state situation may change back end of the price curve will go up and operators will be able to hedge.

      • Wood Mac says positive cash flow could be achieved by 2020.
        https://www.spe.org/en/jpt/jpt-article-detail/?art=3268
        Don’t have access to the report – not sure if they just assumed $65 oil. Plausible or “give me same stuff you are smoking”?

  8. Can’t wait. I love camping

    • Virginia in Eastern Oregon | August 25, 2017 at 7:46 am |

      Shane!! Heh, heh…. Thanks, hard to burst out in a chuckle before 7AM. 😁😁

  9. While the article was a great heads up for any investor, looking at the whole fracking industry from a macro level, all we are doing is creating debt we’ll never pay back in the future to subsidize the pumping of oil and gas we need now to literally survive. It doesn’t matter how unprofitable the industry is, they will be paid to keep pumping. If not by investors, then by the central bank system. Energy is money, debt is not. They were always ahead economically. Granted, they will run out shortly, but for now it is Kick The Can Down The Road.

  10. silverfreaky | August 25, 2017 at 8:27 am |

    Tahoe Resources smashed.(-20%)

    • silverfreaky,

      Yes… I saw that. I try to warn investors about TAHOE, but other precious metals analysts said this was not a big issue. Well, they don’t have all the facts. I will be putting out another article today.

      steve

  11. The main selling point for buying stocks in the Permian Basin is that there are layers upon layers of oil. Drill down to hit one layer and drill through some more rock and hit another layer and keep going for four layers. Supposedly there is more oil than Saudi Arabia. If this is true then why the decline in production?

  12. You need to analyze their balance sheet as well if you want to make an accurate assessment of the company’s health.

    “Unfortunately, they did not have the funds to pay their $72.7 interest expense that quarter.”

    This is not correct. The interest expense was paid by cash from the balance sheet. This is why it’s booked as an expense on the P&L.

    ‘Income from Operations’ is just another way of saying EBIT, which is why the interest expense is shown below it, it doesn’t mean they didn’t pay it.

  13. Mel in Montana | August 25, 2017 at 2:22 pm |

    @Dan: Decline is a function of Permeability and Porosity vs pressure drop and entrained gases, etc. This basis is in hydraulics in nature. Whereas, the “oil in place” or even “reserves” figures are based in math, gross acres x depth of FM above oil-water contact (if any) X porosity factor and then divided back from “volume” into BARRELS (API bbl is 42 US gal).

    These shale wells depend 100% upon frac’ing for production. Such methods induce monster IP (initial production), but, due to the effective radius of drainage, this initial rate “falls off rapidly”…ie: decline.
    In the early days, before there was huge borrowing to fund these 7 to 10 million buck frac jobs…with oil around $100/bbl…You could “cover your costs” from this flush IP flow and still have some “small level” of longer term production for profit. It was a race – to see which would happen first…pay off of well costs or failure to pay off…these different responses from well to well drove research and experiments for: 1) Lower Frac costs vs oil flows/recovery of costs, and 2) Improved Frac methods (multi stages, etc) to drive the recovery rates higher overall. Some of both have been realized now – but, the ECONOMICS of the entire play have changed with the collapse of oil prices. Just remember, ALL of this DEBT that was piled on during these ensuing years still rests within those producing companies… This is the “over-hang” that is going to result in a lot of restructuring/mergers/consolodations/buy-outs AND /BK/!.
    With some possible change in demand (shortage by 2020??) driving prices higher, some of these early companies “may” survive…but, most won’t due to the debt ledge. Won’t hold my breath..
    There have been some very “major” conventional oil discoveries around the world in the past year/18 mo…Figure 4 to 8 years for them to “come online”…which, blows by 2020, eh?. The ONE area within the USA which has the ability to fully “replace” such loss of production is ANWR up in Alaska. Trump et al seem convinced to open it up, along a narrow strip of shore areas… The TAPS pipeline is already there…it can handle an easy 1 to 1.5 million bbl per day from this eastern area…I am really wondering why no one has yet tried to take Prudhoe Bay gas and ship it as LNG down the side of the haul road into Fairbanks, and via AK RR on down to Anchorage…this could be a small inch line…sure would help out those residents and could open up some really large businesses in SE/Interior AK.. YMMV. Check-6

  14. Verbalizing the EIA data and the decline curves of shale is just describing the nature of the business. It just is what it is. It’s not a reason to be afraid or to extrapolate to near term economic doom and gloom.
    Cherry picking data doesn’t help either, just one simple example of many – what about the 7059 wells in July 2017 alone that were drilled but not completed, those costs were put on the balance sheet and hence not yet generating revenue which is HUGE.
    Today, oil is strategic to global power. If anyone believes that publicly available data on any oil in the ground is the full truth they need to read history and specifically war history.
    Shale is only one part of the whole global energy picture. There is significant innovation in all other forms of energy.
    Shale physics alone will likely not doom the USA in the short term. But, the math on the debt and health care costs factually will. Rising interest rates will only exacerbate that.
    Buying gold will not help if in anticipation to doom and gloom, because when nations have trouble the governments in emergency will take what they need and furthermore in the USA the need to share equally among everyone is already strong and growing.
     

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