U.S FRACKING OIL INDUSTRY IN TROUBLE: Investors Losing Faith??

Even though U.S. shale oil production continues to reach new record highs, investors might be finally losing faith in the industry that just isn’t profitable.  A perfect example of this, legendary oil trader Andy Hall, known as “God” in the industry, is shutting down his main hedge fund.  Hall, who is a noted bull in the oil market, saw his hedge fund, Astenbeck Master Commodities Fund II, lose 30% in the first half of 2017.

While Hall’s hedge fund likely lost money betting that oil prices would rise, the entire energy complex took a beating last week, even though oil and natural gas prices increased.   According to the article, Oil Has A Crisis Of Faith, the situation in the U.S. E&P energy sector took a turn for the worst:

If tumbling oil and gas prices aren’t the obvious reason for the sell-off in E&P stocks, then what is?

The likeliest culprit is fear that, even if oil prices aren’t falling further, they are low enough to affect E&P firms’ growth plans — as evidenced in guidance given on a number of quarterly earnings calls this week and last.

One of the biggest losers this week has been Pioneer Natural Resources Co., down 16.5 percent since reporting results on Tuesday evening. Part of the reason it was clobbered so badly is that while it merely trimmed its overall growth rate, it sharply cut its guidance for how many more barrels of higher-value oil it will produce this year. Pioneer blamed this on problems it had with what it called “train-wreck” wells suffering from changes in pressure and the amount of water coming up, forcing the company both to delay its drilling schedule and spend more to strengthen wells.

As we can see in the chart above, all types of energy stocks sold off even though the price of oil increased.  In addition, Pioneer Resources stock price is now down nearly 17% since their second quarter news release:

Pioneer Resources is one of the larger players in the Permian oil basin in Texas.  According to the data put out by Gurufocus.com, Pioneer suffered negative Free Cash Flow of $155 million Q1 and $252 million in Q2.  Actually, Pioneer spent a great deal more on capital expenditures (CAPEX) in the second quarter of 2017, by investing $731 million versus $519 million in the first quarter.

Which means, Pioneer spent $212 million more on CAPEX in the second quarter, only to suffer a larger negative free cash flow of nearly $100 million more versus the previous quarter.  Of course, this makes perfect sense in our TOTALLY INSANE business world today to spend $212 million on CAPEX only to lose an additional $100 million in free cash flow.

Another large oil player in the Permian, Occidental Petroleum, lost $300 million in its core upstream U.S. segment.  The upstream segment of an oil company’s earnings comes from its oil and gas wells.  Downstream is the selling of its petroleum products in retail markets and etc.  Not only did Occidental lose $300 million in its domestic U.S. upstream earnings in Q2, it also lost $191 million in the first quarter.

Big 3 U.S. Oil Companies Still Struggling Even With Higher Oil Prices

The Big Three U.S. Oil companies have also suffered losses in their U.S. upstream earnings.  Exxonmobil lost $201 million and Chevron lost $22 million in the first half of 2017 in its U.S. upstream earning segment.  ConnocoPhillips lost $2.7 billion in its U.S. earnings segment during the first half of 2017, however this was mostly due to a huge impairment write-down.

Regardless, no one is really making money producing oil and gas in the United States.  While some of these companies may now be reporting positive free cash flow, this has been mainly due to the huge cutting of their of CAPEX spending.  For example, these top three U.S. oil companies were spending a great deal more on CAPEX in 2013 than they will in 2017:

Top 3 CAPEX Spending (Exxonmobil, Chevron & ConnocoPhillips):

2013 = $86.6 billion

2017 Est. = $31 billion

These top three U.S. oil and gas majors will reduce their CAPEX spending by $55.6 billion in 2017 compared to 2013.  This is a decline of two-thirds in CAPEX spending in just four years.  When a company drastically cuts its CAPEX spending, it becomes easier to make free cash flow.  However, by cutting their capital expenditures by two-thirds, these U.S. oil majors will not be adding much in the way of new discoveries or additional oil production in the future.

Moreover, Occidental Petroleum, the largest oil producer in the Permian, enjoyed decent free cash flow during the second quarter of 2017.  However, a large percentage of their $1 billion in free cash flow was due to a NOL- Net Operating Loss adjustment of $737 million.   Occidental actually suffered a negative free cash flow of $111 million in the first quarter of 2017.

That being said, Occidental, was able to enjoy free cash flow because it cut its overall CAPEX spending from $8.4 billion in 2014, down to an estimated $3.3 billion in 2017.  So, by cutting its CAPEX spending by $5 billion, it’s much easy to make positive free cash flow:

Not only has Occidental CAPEX spending declined since 2014, so has its cash from operations.   Hence, the reason for the huge cut in CAPEX spending.  Occidental reported a healthy $11 billion in operating cash in 2014.  However, this fell to $3.4 billion last year as the price of oil dropped to an annual low not seen since 2004.

As U.S. oil companies continue to sacrifice exploration and capital expenditures to become profitable or at least break-even, this will cause big problems for oil supplies in the future.  That being said, the oil industry has another negative factor to deal with that could spell additional trouble for the fracking oil industry in the future.

Fracking Oil Wells In The Permian Basin Consumes A Staggering Amount Of Fresh Water

One little factor that seems to be overlooked in the media is the staggering amount of water consumed in the production of shale oil and gas in the United States.  According to a study reported by Scientific America back in 2015, stated:

Oil and natural gas fracking, on average, uses more than 28 times the water it did 15 years ago, gulping up to 9.6 million gallons of water per well and putting farming and drinking sources at risk in arid states, especially during drought.

Though fracking is used to produce natural gas in less-arid regions such as Pennsylvania, many of the nation’s fracking operations occur in places where water may become scarcer in a warming world, including Texas, the Rocky Mountains and the Great Plains—regions that have been devastated by drought over the last five years.

As the USGS study indicates, a lot of the oil and gas fracking is taking place in more arid climates.  One such arid climate is the Permian Basin in West Texas.   According to another article titled, As The Oil Patch Demands More Water, West Texas Fights Over Scarce Resource:

“The Permian Basin is basically a desert, and that immediately presents challenges in finding adequate water,” French said. “You can do without a lot of things. But you can’t do without water.”

At least three other companies in the region are selling or planning projects to sell water to energy companies that use it by the billions of gallons to crack shale rock and release oil and gas. Water use in the Permian has risen six-fold since the start of the shale oil boom, from more than 5 billion gallons in 2011 to almost 30 billion last year. Energy research firm IHS Markit predicts demand will double by the end of this year, to 60 billion gallons, and more than triple by 2020, to almost 100 billion.

As we can see in the chart above, oil and gas companies in the Permian are estimated to consume a staggering 60 billion gallons of water in 2017, double from the 29.6 billion gallons last year.  And if these energy companies get enough silly investor money, they will need nearly 100 billion gallons of water by 2020 to produce oil in gas in the Permian.

Unfortunately, water is a scare resource in West Texas as farmers, ranchers, environmentalists and residents are worried that the tapping into billions of gallons of water in underground aquifers will  impact the local cattle industry, agricultural crops and possibly dry up natural springs in the area.

The race for the U.S. to produce more oil than we have in more than four decades is costing an arm, leg and a foot, as well as consuming one heck of a lot of fresh water.  I believe we are going to look back at this point in history and wonder… WHAT IN THE HELL WERE WE THINKING???

As I have mentioned in several articles and interviews, the wonderful U.S. Shale Oil & Gas Industry really hasn’t made any money for nearly a decade.  However, they have added a great deal of debt.  Let me present this chart one more time because nothing has changed since the last time I posted it:

Over the next three years, the debt (low investment grade energy bonds) that these energy companies will have to pay back jumps from $67 billion in 2017 to over $230 billion in 2020… just at the time the Permian Basin is forecasted to peak in oil production.  However, I have my reservations on that prediction.

While the U.S. continues to produce oil that isn’t really profitable, the overall debt level in the energy sector will likely increase.  The only way for this FACADE to continue is under the Fed Policy of low or zero interest rates.  If the Fed continues to raise rates, this will certainly put a real KIBOSH on the U.S. Shale Oil and Gas Industry’s ability to finance their ever increasing amount of debt.

Lastly…. oil production in the U.S. will likely continue to rise for a while.  The Mainstream media will point to American ingenuity and the push for energy independence as the reasons for all this wonderful new oil production.  Unfortunately, someone along the way forgot to mention that most this oil was produced at a loss.  The POOR SLOBS that are really going to feel the pain are the investors who went after HIGH YIELD returns as they couldn’t find it in the market today.

Even though the U.S. shale oil and gas companies continue to pay their interest expense (yield to these investors), that has an expiration date.  Once that expiration date arrives, and these investors ask for the original funds back….. is when they wish they had purchased gold and silver instead.

But….. sometimes it really takes getting beat up financial to wake up to the fundamentals of owning physical precious metals.

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24 Comments on "U.S FRACKING OIL INDUSTRY IN TROUBLE: Investors Losing Faith??"

  1. Steve,

    If someone was writing this as fiction, the author would be laughed out of Dodge as it is too absurd to be believed. This is not going to end well and, if guys like Andy Hall are throwing in the towel, the end has got to be getting close. Frankly, I don’t understand how it got this far. Only thing I can figure, is that it is money managers investing other peoples money and not really giving a shit because they feel forced to find yield to justify their pay even though they know that it is a fools game.

    Thanks for another great one.

    SteveW

  2. They only way someone can cut CAPEX and borrow money to pay dividends is an HONEST, GOOD FAITH belief that the problem is truly temporary and that there is real expectation of a resolution in the near future.

    Otherwise, it is just like the guy that knows he is headed for bankruptcy and decides he may as well red line the credit cards and go on a deluxe vacation before they pull the plug.

    Given the state of oil depletion and the insanity of the financial markets, I do not believe any one in the oil and gas industry honestly and in good faith believes that the light at the end of the tunnel is anything but an oncoming train wreck. What totally terrifies me is that there are so many “professionals” making the same stupid moves knowing that the music is going to stop soon. What the hell are they thinking?

    SteveW

    • “What are they thinking?”
      It took me a while for the hidden in plain sight ‘printed penny’ to drop😃, the problem is while these chaps give each other a pat on the back and pour another glass of the good stuff for being so clever there are unenvisaged consequences. I can envisage an oil shortage in the not to distant future, I notice Politicians globally manoeuvring policies to battery technology and I wonder if there are enough available minerals to fuel their ambition…

  3. Steve,
    Realistic the figures are not really huge if one looks at the amount of money that is
    being printed by for example the Fed, ECB, Bank of Japan and others I believe that
    this party will continue for a while. Especially because of this nearly 0% intrest rate
    policy which created this mess in the first place. I suspect that most of the shareholders of these fracking companies are at least controlled by wallstreet & the Fed. In a normal world all fysical assets should be increasing in value with all this fake money/credit money. We have borrowed the consumption from the future and now we are looking in a black hole like a dying star. How long can this be papered over? Not so long if we see how many countries the usa wants to attack.

  4. Conventional Oil Peaked in 2006 –IEA
    http://imgur.com/a/hccu9

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

    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/

    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

    German Army (leaked) Peak Oil study warns world oil shortages would collapse the global economy and 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

  5. Mike Bogenschutz | August 9, 2017 at 8:40 pm |

    Steve. Would a lower dollar help hold up the price of oil? If so, would this help the industry meet its debt obligations?
    Mike

    • Mike Bogenschutz,

      Normally, the DOLLAR & OIL price have been moving on an INVERSE relationship. However, that hasn’t been the case for the past year. For example, when the US Dollar Index moved up from a 93 in May of 2016 to a high of 103 at the beginning of 2017, the West Texas Oil price increased from $41 to $54 during the same time period.

      Furthermore, as the US Dollar Index fell from 103 down to 93 currently, while the West Texas Oil price has fluctuated, the net result is that the oil price has fallen from $54 down to $49 currently. So, there doesn’t seem to be that INVERSE correlation any longer.

      I do believe we could see a falling US Dollar Index along with a falling West Texas oil price in the future. The only option I could see the oil price rising if the Petro-Dollar system really fell apart and inflation skyrocketed in the United States… separate from what was taking place in other fiat currencies around the world.

      steve

  6. silverfreaky | August 10, 2017 at 2:23 am |

    The USA is an import land.If the dollar gets lower the USA gets inflation.
    And then those big debts.Additionally they need low oilprices because of the high energy consumption.Raising the interest rate would help to attract money.But every where is the trap of the big debts.
    Trump was in Russian.I read an article where Putin says he wants to trade raw materials(oil) in rubel(or lets say not in dollar).Trump walked away.He said he can’t do that.

    The US-establishment is dependent from cheap energy.It’s simple like that.In the beginning as us-president Trump was known as a friend of Putin.After brainwashed with the oil-problem he changed his behaviour.That’s the reason why they establishment want war.Attracting money to the financial system(still the save haven currency) and boosting the weapon industry.

  7. The Saudi’s are going to remove their peg after their IPO sale. Then the dollar will collapse!
    https://www.perchingtree.com/saudi-aramco-ipo-key-risks-loom-for-investors/

  8. Steve: Notice silver rising? It is not from anything you or Cloud had to say but simply supply/demand fundamentals. A safe haven, if you will? This could accelerate creating a shortage of silver. We will notice this by observing lead times extending from a few days to a month or so. When that occurs it is time to buy. Then the weakening mine production may have an affect also.

    • Joe Lindell,

      You are an interesting chap. So, you come in here and BELLY-ACHE when the price of silver heads lower, and then you also COMPLAIN during a nice price rise and say that it had nothing to do with Tom Cloud, after Tom just made a SILVER BUY ALERT.

      Joe, so you say the rise in the silver price is due to supply and demand fundamentals. I disagree. Supply & Demand fundamentals haven’t impacted silver’s price for years and years.

      Lastly, Tom Cloud gave a SILVER BUY ALERT due to several factors which you don’t seem to understand. One is the bottoming COT REPORT structure. Technical Analyst Clive Maund has been screaming about this for several weeks now as one of the best SILVER BUYING opportunities in many years.

      Furthermore, Tom followers one of the best Gold and Silver Timing Analysts in the world. According to his analysis, both gold and silver are at bottoms looking for a good move higher.

      Now, I don’t know if this is going to turn into a MUCH LARGER MOVE… we will have to see. But, for you to come in here and leave a comment suggesting that YOU KNOW BETTER than Tom Cloud, then maybe you should start your own website.

      steve

      • Great idea Steve! I never thought of that. Since I had great teachers,like Cloud, Morgan , Butler,etc., that have been predicting higher silver prices every year for the past seven or eight years, and being wrong each and every year, it should be quite easy. I’ll begin with saying silver bottomed a few days ago and it will be higher than it is today. email me for details!
        new website.

    • DisappearingCulture | August 10, 2017 at 1:10 pm |

      “Steve: Notice silver rising? It is not from anything you or Cloud had to say but simply supply/demand fundamentals.”

      Incorrect. It is priced on the COMEX, which has very little to do with physical supply & demand fundamentals.

  9. Collapse of Global Civilization (Starter Pack)
    http://imgur.com/a/gzSem

  10. WannabeMacro | August 10, 2017 at 9:45 am |

    @Mastermind – I read the article link. It says that Dollar will strengthen and then over time, it may crash due to deflation. Please tell me if I am reading something wrong.

    https://www.perchingtree.com/saudi-riyal-dollar-peg-abandon-dilemma/

  11. Mastermind,
    Re, starter pack for collapse of Global Civ. I clicked the link. Talk about lazy, whoever posted it couldn’t be bothered to provide links to the source materials or even bother to give full titles and author names. If you don’t already know what the references are to, the think is practically useless. Come on!

  12. Money

    That picture at the top of this post is 90-year-old Stephen Ivičinec, posing with a good portion of his life’s savings of one million, two hundred thousand Yugoslavian dinars. He and his wife, Kate, hoarded them for a rainy day, hidden away for years in cushions and pillows, right there in their home. And then, in 2014, that rainy day finally arrived.

    As they sat listening to their son and his wife explain the dire situation they were in, desperate for even enough money for seeds to plant their fields, Stephen looked over at his wife with a smile, and said, “Come now, Kate, bring a cushion and the scissors. See? They have come to the dark days we always feared, but were spared. Now you can finally see that it was good to listen to me and to save, and not spend the money like you wanted.”

    Stunned and in disbelief, his son and daughter-in-law held their breath as they watched him rip open his favorite cushion and pull out a bunch of the old Yugoslavian dinars. “What’s wrong?” Stephen asked. “Not enough? If you need more, we’ll just open another cushion! Don’t worry, we’ll never go hungry. We’ll have enough seeds for the rest of our lives!”

    Stephen and Kate had no idea that the dinars were now worthless, which was why they didn’t understand the stunned look their generous offering brought. Their cash stash had once been worth about $50K (DM 93,000). Of course, Yugoslavia broke up in 1991, and, in ‘92 and ‘93 went through one of the worst bouts of hyperinflation in history, with a peak inflation rate of 313 million percent. Here is the original Croatian article.

    https://3.bp.blogspot.com/-oDhfACzVNxY/WQu8FLheYqI/AAAAAAAAHMo/3PCG3iRg7wYM2QK8P8TWgi37Fqr4Er1OQCLcB/s1600/Stjepan_Ivicinec01.jpg

    http://fofoa.blogspot.nl/2017/05/money-or-wealth.html

  13. Bitcoin at nearly 4000 USD, only surpassed including the bitcoin cash fork.
    I predict that SRS Rocco will increase its crypto exposure when 5000 is reached and will go full crypto when bitcoin will exceed 10 000 USD, hopefully by the end of the month.

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