U.S. SHALE OIL PRODUCTION UPDATE: Financial Carnage Continues To Gut Industry

As the Mainstream media reports about the next phase of the glorious U.S. Shale Oil Revolution, the financial carnage continues to gut the industry deep down inside the entrails of its horizontal laterals.  The stench of fracking fluid must be driving shale oil advocates utterly insane as they are no longer able to see the financial wreckage taking place in these companies quarterly reports.

This weekend, one of my readers sent me the following Bloomberg 45 minute TV special titled, The Next Shale Revolution.  If you are in need of a good laugh, I highly recommend watching part of the video.  At the beginning of the video, it starts off with President Trump stating that the U.S. has become an energy exporter for the first time ever.  Trump goes on to say, “that powered by new innovation and technology, we are now on the cusp of a new energy revolution.”  While I have to applaud Trump’s efforts for putting out some positive and reassuring news, I wonder who is providing him with terribly inaccurate energy information.

I would kindly like to remind the reader; the United States is still a NET IMPORTER of oil.  We still import nearly six million barrels of oil per day, but we export some finished products and a percentage of our shale oil production.  Thus, we still import a net of approximately three million barrels per day of oil.

A few minutes into the Bloomberg video, both Pioneer Resources Chairman, Scott Sheffield, and Continental Resources CEO, Harold Hamm, explain how advanced technology will revolutionize the shale oil industry and bring down costs.  I find that statement quite hilarious as Continental Resources and Pioneer continue to spend more money drilling for oil and gas then they make from their operations.  As I stated in a previous article, Continental Resources long-term debt ballooned from $165 million in 2007 to $6.5 billion currently.  So, how did advanced technology lower costs when Continental now has accumulated debt up to its eyeballs?

Of course… it didn’t.  Debt increased on Continental Resources balance sheet because shale oil production wasn’t profitable… even at $100 a barrel.  So, now the investor who purchased Continental bonds and debt are the Bag Holders.

Regardless, while U.S. oil production continues to increase at a moderate pace, there are some troubling signs in one of the country’s largest shale oil fields.

Shale Oil Production At the Mighty Eagle Ford Stagnates As Companies’ Financial Losses Mount

It was just a few short years ago that the energy industry was bragging about the tremendous growth of shale oil production at the mighty  Eagle Ford Region in Texas.  At the beginning of 2015, Eagle Ford oil production peaked at a record 1.7 million barrels per day (mbd).  Currently, it is nearly 500,000 barrels per day lower.  According to the EIA – U.S Energy Information Agency’s most recently released Drilling Productivity Report, oil production in the Eagle Ford is forecasted to grow by ZERO barrels in December:

The chart above suggests that the companies drilling and producing oil in the Eagle Ford spent one hell of a lot of money, just to keep production flat.  Even though the shale oil producers were able to bring on 88,000 barrels per day of new oil, the field lost 88,000 barrels per day due to legacy declines.  We need not take out a calculator to understand production growth at the Eagle Ford is a BIG PHAT ZERO.

Here are the five largest shale oil and gas producers in the Eagle Ford:

  1. EOG Resources
  2. ConocoPhillips
  3. BHP Billiton
  4. Chesapeake Energy
  5. Marathon Oil

The company that doesn’t quite fit in the energy group above is BHP Billiton.  BHP Billiton is one of the largest base metal mining companies in the world.  Unfortunately for BHP Billiton, the company decided to get into U.S. Shale at the worst possible time.  BHP Billiton bought shale oil properties when prices were high and eventually had to liquidate when prices were low.  A Rookie mistake made by supposed professionals.  I wrote about this in my article; DOMINOES BEGIN TO FALL: BHP Chairman Says $20 Billion Shale Investment “MISTAKE.”

I decided to take a look at the current financial reports published by the five companies listed above.  The largest player in the Eagle Ford is EOG Resources.  I went to YahooFinance and created the following Cash Flow table for EOG:

In the latest quarter (Q3 2017), EOG reported $961 million in cash from operations.  However, the company spent $1,094 million on capital (CAPEX) expenditures and another $96 million in shareholder dividends.  Applying simple arithmetic, EOG spent $229 million more on CAPEX and dividends than it made from its operations.  Maybe someone can tell me how advanced technology is bringing down the cost for EOG.

The next largest player in the Eagle Ford is ConocoPhillips.  If we look at ConocoPhillips net income at its different business segments, we can see that the company isn’t making any money producing oil and gas in the lower 48 states:

While ConocoPhillips enjoyed a $103 million profit in Alaska, it suffered a $97 million loss in the lower 48 states.  Thus, the third largest oil company in the U.S. isn’t making any money producing oil and gas in the majority of the country.  According to the data, ConocoPhillips produced twice as much oil and gas in the lower 48 states then what they reported in Alaska, but the company still lost $97 million.

The third largest company producing oil in the Eagle Ford is BHP Billiton.  Instead of providing financial results, I thought this chart on BHP Billiton’s Return On Capital Employed was a better indicator of how bad their U.S. Shale assets were performing.  If we look at the right-hand side of the chart, BHP Billiton’s shale oil resources have become one hell of a drag on the company’s asset portfolio:

While BHP Billiton is enjoying a healthy positive Return On Capital Employed on most of its assets, shale oil resources are showing a negative return.  Furthermore, the company makes a note to above stating, “Detailed plans to improve, optimize or EXIT.”  I would bet my bottom Silver Dollar that their decision will end up “EXITING” the wonderful world of shale energy, with the sale of their assets for pennies on the dollar.

Moving down the list to the next shale company, we come to Chesapeake.  While Chesapeake is the country’s second-largest natural gas producer, the company has been losing money for more than a decade.  Unfortunately, the situation hasn’t improved for Chesapeake as its current financial statement reveals the company continues to burn through cash like a druken sailor:

Chesapeake’s net cash provided by its operating activities equaled $273 million for the first three-quarters of 2017.  However, the company spent a whopping $1,597 million on drilling and completion costs (CAPEX).  Thus, Chesapeake spent $1.3 billion more on producing its oil and natural gas Q1-Q3 2017 than it made from its operations.  Again, how is advanced technology making shale oil and gas more profitable?

If it weren’t for the asset sale of $1,193 million, Chesapeake would have needed to borrow that money to make up the difference.  Regrettably, selling assets to fortify one’s balance sheet isn’t a long-term viable business model.  There are only so many assets one can sell, and at some point, in the future, the market will realize those assets will have turned into worthless liabilities.

Okay, we finally come to the fifth largest player in the Eagle Ford…. Marathon Oil.  The situation at Marathon isn’t any better than the other companies drilling and producing oil in the Eagle Ford.  According to the companies third-quarter report, Marathon suffered a $600 million net income loss:

Again, we have another example of an energy company losing a lot of money producing shale oil and gas.  You will notice how high Marathon’s Depreciation, depletion, and amortization are in both the third-quarter and nine months ending on Sept 30th.  While some may believe this is just a tax write off for the company… it isn’t.  Due to the massive decline rate in producing shale oil and gas, PLEASE SEE the FIRST CHART ABOVE on the EAGLE FORD GROWTH OF ZERO, these companies have to write off these assets as it represents the BURNING of CASH.

For example, Marathon reported cash from operations of $1,487 million for Q3 2017.  However, it spent $1,305 million on CAPEX and $128 million on dividends for a total of $1,433 million.  Thus, Marathon actually enjoyed a small $53 million in positive free cash flow once dividends were deducted.  But, that is only part of the story.  If we go back to 2005 when the oil price as about the same as it is today, Marathon was reporting quarterly profits, not losses.

In the first quarter of 2005, Marathon earned a positive $324 million in net income.  It also reported a $258 million net income gain in 2004, even at a much lower oil price of $38 a barrel versus the $48-$50 during Q3 2017.  So, the Falling EROI – Energy Returned On Invested is killing the profitability of shale oil and gas companies today, whereas they were making profits just a decade ago.

Now, I didn’t provide any data on the other shale oil fields in the U.S., but production continues to increase in several regions, especially in the Permian.  However, one of the largest players in the Permian, Pioneer Resources, isn’t making any money either.  If we look at their financials, we can see that Pioneer continues to spend more money on CAPEX than they are receiving from cash from operations:

In all three quarters in 2017, Pioneer spent more money on capital expenditures than it made from its operating activities.  Pioneer spent $400 million more on CAPEX spending than from its operations for the first nine months of 2017 ending on Sept 30th.  So, here is just another example of a U.S. shale oil producer who partly responsible for the rising production in the Permian, but it still isn’t making any money.

Now, some investors or readers on my blog would say that the situation will get better when the oil price continues towards $60, $70 and then $80 a barrel.  Well, that would be nice, but I believe we are heading towards one hell of a market crash.  Even though some economic indicators are looking rosy, this market is being propped up by a massive amount of debt and the largest SHORT VIX trade in history.  When the markets start to go south as the massive VIX TRADE reverses… well, watch out below.

Thus, as the markets crash, the oil price will head down with it.  Unfortunately, this will be the final blow to the U.S. Shale Oil Ponzi Scheme and with it… the notion of Energy Independence forever.


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29 Comments on "U.S. SHALE OIL PRODUCTION UPDATE: Financial Carnage Continues To Gut Industry"

  1. What a mess, even if Shale Oil is a viable option just look what we are doing to the planet to get this stuff out of the ground. The billions of gallons of water that could be used for drinking or food production now goes to the Shale industry and how about the toxic chemicals that’s left behind.

    • lastmanstanding | November 15, 2017 at 8:58 am |

      No one even seems to care Rod.

      The housing/development boom is another sore on the planet. Hardly any real means of supplying water and sewer being constructed to support it.

      Please…do not mention eroi to anyone! We’re being way to negative! 😉

  2. Michael Kohlhaas | November 14, 2017 at 9:16 am |

    When I read your posts it scares the Jesus out of me. And what I dislike most: everything is backup by facts. Can’t we just be happy and dream on?

  3. Conventional Oil Peaked in 2006 –IEA-EIA-NATURE-ENERGY-SCIENTIFIC AMERICAN

    New Oil Discoveries by Scientists have been declining since 1965 and last year was the lowest in history

    We have been draining our oil reserves by consuming more oil than we discover since the 1980’s

    Aging giant oil fields produce more than half of global oil supply and are declining (Hook, 2009)

    Saudi Arabian oil reserves are overstated by 40% – Wikileaks

    BP 1.7 Trillion barrels proven oil reserves NOT so proven

    IEA Chief warns of world oil shortages by 2020 as discoveries fall to record lows

    Saudi Arabia’s Energy Minister Warns of World Oil Shortages Ahead

    Saudi Aramco CEO believes oil shortage coming despite U.S. shale boom

    UAE warns of world oil shortages ahead by 2020 due to industry spending cuts

    Halliburton CEO says oil will spike due to oil shortages by 2020 after Industry Cuts

    Total CEO warns we are going to have oil shortages around 2020 due to lack of investment & new discoveries

    HSBC Global Bank warns 80% of the worlds conventional fields are declining and world oil shortages ahead

    UBS Global Bank warns of industry slowdown and world Oil Shortages by 2020

    CitiBank CEO warns of oil shortages coming as soon as 2018

    Wood Mackenzie warns of oil supply crunch and world oil shortages around 2020

    Energy watchdog warns oil and electricity shortages could develop as investment falls

    Why investors’ should brace for a devastating oil shortage ahead around 2020

    People are almost completely ignoring a looming crisis for oil

    World Oil Shortages To Lead To Oil Price Spike By 2020s, warns Goldman Sachs

    Chevron CEO warns US shale oil alone cannot meet the world’s growing demand for crude

    China Government Study: China’s Oil Production is About to Peak in 2018 & Coal in 2020 (Wang, 2017)

    Mexico Oil Reserves Gone in 9 Years Without New Finds

    Saudi Arabia may be out of oil to export by 2030 – Citibank

    Edinburgh Study: Only 10 years of UK’S North Sea Oil and Gas Remaining (Thompson, 2017)

    The world’s largest oil trader Vitol says US oil production will peak in 2018

    The US Shale Business is NOT PROFITABLE and can’t fund itself whether oil is at 100 or 50 dollars a barrel

    MIT Technology Review: Shale Oil Will Boost U.S. Production, But It Won’t Bring Energy Independence

    The new economic science of capitalism’s slow-burn energy collapse

    Long-term estimates of the (EROI) of coal, oil, and gas global productions (Court, & Fizanie, 2017)

    EROI of different fuels and the implications for society, Energy, EROI and quality of life. (Lambert, & Hall, 2014)

    Cornell University: Energy Studies in the College of Engineering. The Challenges of Peak Oil

    The End of Peak Oil? Why this topic is still relevant despite recent denials (Chapman, 2014)

    Projection of World Fossil Fuels by Country (Mohr, 2015)

    The Global Oil & Gas Industry Is Cannibalizing Itself To Stay Alive

    We Could Be Witnessing the Death of the Fossil Fuel Industry—Will It Take the Rest of the Economy Down With It?


    USA GAO Study: Uncertainty about Future Oil Supply. Addressing a Peak and Decline in Oil Production

    Australian Government (Leaked) Study: concludes world peak oil around 2017

    German Military (leaked) Peak Oil study concludes: oil is used directly or indirectly in the production of 90% of all manufactured products, so a shortage of oil would collapse the world economy & world governments

    UC Davis Study: It Will Take 131 Years to Replace Oil with Alternatives (Malyshkina, 2010)

    University of Chicago Study: predicts world economy unlikely to stop relying on fossil fuels (Covert, 2016)

    ‘WORSE THAN 2007’: Top banker warns of looming wave of worldwide bankruptcies

    We Are In A Depression, If Borrowing Money Is Not Income

    Perching Tree: Return of the Global Depression 2.0

    Perfect Storm: Energy, Finance and the End of Growth -Dr Tim Morgan Global Head of Research

    Causes and Consequences of the Oil Shock of 2007-08 (Hamilton, 2009)

    World Scientists “Warning to Humanity” Signed by 15,000 Scientists Including the Majority of all Nobel Prize Winners

    Scientific American: Apocalypse Soon: Has Civilization Passed the Environmental Point of No Return?

    NASA Study: Industrial Civilization is Headed for Irreversible Collapse (Motesharrei, 2014)

    The Royal Society: Study, Now for the First Time A Global Collapse Appears Likely (Ehrlich, 2013)

    Study: Limits to Growth was Right. Research Shows We’re Nearing Global Collapse (Turner, 2014)

    Study: Financial System Supply-Chain Cross-Contagion: in Global Systemic Collapse (Korowicz, 2012)

    The End of the Human Race will be that it will Eventually Die of Civilization –Ralph W Emerson

    • Michael Kohlhaas | November 14, 2017 at 11:04 am |

      Thanks! Now I’m suicidal!

      • Try to imagine one day the TV signal cuts out. “Standby”. Gunshots go off in the distance. You go to buy some groceries and some of the shelves are empty, then half of the shelves, then most of the shelves. Feeling hungry, desperately trying to grow a garden in the backyard at the last minute. Worrying about security constantly. You see an abandoned police car. People with guns riding by on bicycles hauling supplies in cart covered with tarp. You see a dead body on my way to look for food out in town. Eventually far right groups fill the social and political vacuum, then far left groups react. Then violence. Everyone has something to say and they’re shouting it on the unkempt street corners getting into fights.Can’t get on Reddit, can’t get on Google search – the mighty internet has fallen…

  4. I took my wife’s “Toyoto Prado” (I still drive a 1997 Ford because I can’t afford the price of another vehicle and the cost to run it) down to fill up the tank yesterday, it cost me AUD $227.00; I thought F**##, $1.48/Litre. In USD Dollars $4.27/Gallon.

  5. Now now , Ed… Steve has never insinuated that he is “legendary”, and he doesn’t sell subscriptions (or coins), just has voluntary supporters. In that sense he is way above the PM permabull/“the end is near – so buy my stuff !” crowd.
    On substance, I’m highly skeptical. I’ll believe a catastrophic “market” crash when I see it, and I’ve never seen it. A big one wouldn’t be good for the powers that be. I still don’t see why the Fed won’t just print a quadrillion or more dollars, and covertly buy every stock/bond they need to in case of trouble. Who’ll stop them ?
    Does it matter if the above companies lose $ drilling for oil ? Eventually some may go bust, or not. Others will take their place, or not. Plenty of multi billion dollar companies perpetually lose $, and keep it going, including my 15 bagger Tesla.
    On EROI I reiterate my stance from a year ago: oil won’t be at $20 (or anywhere near it) by 2020, no matter what Arnaux & the Hills group say. I’m more interested in seeing what the reactions will be. Generally when these predictions fail – as they always have – it’s blamed on manipulation (as if they didn’t know it existed before), and the deadline get pushed out further – they (Hills group) have widgets to sell, after all. Guess we’ll see whether Steve will just admit to being wrong to trust those hacks’ predictions, or not.

    • lastmanstanding | November 15, 2017 at 9:03 am |

      That is absolutely the last way out of all of this.

      Eventually, everyone has to deal with “rough seas”.

      I’ll take my chances on solid ground.

  6. Studies of mice populations indicate that when faced with overpopulation, many catastrophic events occurred. Such as the mothers abandoned their young, increased infant mortality, homosexuality, cannibalism, and lack of maternal functions. Studies revealed as the mice population densities reached a tipping point. Once reached, the population began to suffer a “spiritual death” and went down a “behavioral sink”. (Calhoun, 1962)


  7. Thanks for the latest insightful information. The financial reports from Yahoo gave us the clearest picture yet of what is really happening vice the rosy pictures from the national media….

  8. And the Beat Goes On.

    U.S. Shale To Beat Saudi Production Growth. U.S. shale oil and gas production is set to grow at a record-breaking rate over the next eight years, the International Energy Agency said in its latest World Energy Outlook.


  9. The International Energy Agency said it expected that American oil production between 2010 and 2025 would grow at a rate unparalleled by any country in history, with far-reaching consequences for the US and the world.

    • Mr Manager,

      While U.S. oil production surged since 2007, no one made any money drilling and extracting it. The U.S. Shale Oil Industry was able to produce this oil at a loss because it dumped the debt on the investor, which are hedge funds, pension plans, insurance funds and mutual funds. They are the bag holders of a massive amount of ENERGY DEBT that is coming due which the Energy Industry can’t pay back:

      GOD HATH A SENSE OF HUMOR… and so does the IEA.


      • So in a little over 6 years, the debt wall will have gone from $20 to $260 billion, WOW !

        As the saying goes: “Houston we have a problem”. That’s totally unsustainable.

        • Rodster,

          Yes, it has gotten completely insane. The chart of the coming ENERGY DEBT WALL is not hidden in some government basement facility, it’s out to the public. So, I have no idea why the Mainstream investors can’t see the writing on the wall.


  10. Steve: Your P&Ls show Chesapeake net ($602,000) with +$689,000 in depreciation and Marathon net -$599,000 with $641,000 in depreciation.
    This means they are both cash flow positive.

    • Joe lindell,

      Let me brush you up on Cash Flow Statements. The DD&A, Deprecation, Depletion & Amortization are ADDED BACK IN, not subtracted in Cash Flow Statements. DD&A is deducted from NET INCOME financial statements. However, to calculate the cash flow, the DD&A is ADDED BACK IN.

      Furthermore, the $602 million is not NET INCOME in the Chesapeake cash flow statement, rather it refers to the net cash used in investing activities. The important figures to look at Joe are the $273 operating cash minus the $1.6 billion in capital expenditures.

      So, in both the Chesapeake and Pioneer examples, the DD&A are added back into the calculation to arrive at their NET CASH FROM OPERATIONS.

      Thus, these two companies are seriously HEMORRHAGING CASH.


  11. This belongs to the subject too:


    without any further comment from the deepest South of Germany, in fact_, the deep valley of the still unsuspecting!!


  12. every time i read about oil industry collaps this post on zerohadge come to my mine where Dallas FED responds to article about how Federal Reserve members had met with bank lenders with distressed loan exposure to the US oil and gas sector and, after parsing through the complete bank books, had advised banks to i) not urge creditor counterparties into default, ii) urge asset sales instead, and iii) ultimately suspend mark to market in various instances. to http://www.zerohedge.com/news/2016-01-18/fed-responds-zero-hedge-here-are-some-follow-questions

  13. Steve,
    Soooo with the constant percentage of decline in US oil production each year and the CapEx increasing …. then ultimately either this time next year or sooner the US oil industry will be nationalized. Does that seem the only logical conclusion to you ? That is unless the US government will allow a total collapse which would really ruin everyone’s whole day!

  14. Christoph Weise | November 16, 2017 at 11:51 am |

    It looks like a giant ponzi scheme that continues and continues under the eyes of the regulators and with their explicit approval. It can only be concluded that the professional investors disregard the obvious risks to hunt for a relatively marginal profit on behalf of their clients. It is a strange and very unethical game that is going on.

  15. Miners stocks at a new Low.
    Silver and Gold will follow.

Comments are closed.