AuthorTopic: Fracker Debt Bubble  (Read 113444 times)

Offline Palloy

  • Sous Chef
  • ****
  • Posts: 3754
    • View Profile
    • https://palloy.wordpress.com
Re: Fracker Debt Bubble
« Reply #420 on: March 18, 2016, 04:17:01 PM »
Quote
perhaps even get the court to allow you to operate the company while everything is figured out,

How cheap would the company have to be to allow you to keep operating it when it's losing money on every barrel?  - It would have to be a case of being paid to take it.
The State is a body of armed men

Offline MKing

  • Contrarian
  • Sous Chef
  • *
  • Posts: 3354
    • View Profile
Re: Fracker Debt Bubble
« Reply #421 on: March 18, 2016, 04:45:04 PM »
Quote
perhaps even get the court to allow you to operate the company while everything is figured out,

How cheap would the company have to be to allow you to keep operating it when it's losing money on every barrel?  - It would have to be a case of being paid to take it.

Money isn't being lost on every produced barrel, obviously. The only place this applies are when decommissioning costs exceed the cost of producing below cost. Happens almost exclusively in offshore areas, never onshore that I've ever seen or even heard of.

Sometimes one creates a dynamic impression by saying something, and sometimes one creates as significant an impression by remaining silent.
-Dalai Lama

Offline g

  • Golden Oxen
  • Contrarian
  • Master Chef
  • *
  • Posts: 12280
    • View Profile
Re: Fracker Debt Bubble
« Reply #422 on: March 18, 2016, 04:56:44 PM »
Quote
MKing said Buying production and assets for pennies on the capital dollar was one of the most lucrative deals I've ever been involved in.

Yes, I know the game well, not in the oil industry but precious metals.

The mind boggllng bargains that arise in the securities of cyclical industries is truly amazing and creates one or twice in a lifetime opportunities for the student of such matters.

It takes a lot of very hard study and cast iron nuts to buy at the bottom of a cycle, everyone is bearish, including the folks that own the asset you are purchasing, and you have second thoughts wondering if you yourself might have gone soft in the head, but that's where the Big Big dough is made.

Nothing like a bottom to be making purchases, but not an easy task. Only with the benefit of hindsight does it appear so.

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 39140
    • View Profile
Fracking wells released over 5 billion pounds of methane in one year
« Reply #423 on: April 15, 2016, 07:13:28 PM »
Fracking is Harmless!  Experts know what they are doing!

RE

http://grist.org/article/fracking-wells-released-over-5-billion-pounds-of-methane-in-one-year/

Fracking wells released over 5 billion pounds of methane in one year
By Xian Chiang-Waren on 14 Apr 2016


Being in close proximity to fracking operations could screw up your sexual health, cause developmental defects and cancer, induce seismic activity around you, and the list goes on.

Does all that doom and gloom seem, well, a little vague? An Environment America report released Thursday offers raw numbers, based on a set of industry-reported data going back for more than decade.

Frackers, the report concludes, have used billions of pounds of cancer-causing chemicals in at least 137,000 wells from 2005 to 2015, including:

    • 5 billion pounds of hydrochloric acid, a caustic acid

    • 1.2 billion pounds of petroleum distillates, which can irritate the throat, lungs and eyes; cause dizziness and nausea; and can include toxic and cancer-causing agents

    • 445 million pounds of methanol, which is suspected of causing birth defects

Remember, that’s according to the industry’s own numbers. Not necessarily all of this is affecting drinking water, but some chemicals have made their way into private wells. For example, Pennsylvania officials found 260 instances of private well contamination from fracking in the past decade — a “severe” underestimation, says Environment America.

The report also put a number on the quantity of methane (a greenhouse gas that’s by some estimates 86 times more potent than carbon over a 20-year timeframe) that new fracking wells released into the atmosphere in 2014:  5.3 billion pounds. That, the researchers note, is equivalent to the emissions from 22 new coal-fired plants.
Save As Many As You Can

Offline MKing

  • Contrarian
  • Sous Chef
  • *
  • Posts: 3354
    • View Profile
Re: Fracker Debt Bubble
« Reply #424 on: April 15, 2016, 07:17:20 PM »
Can anyone spot the caveat that negates the entire article?
Sometimes one creates a dynamic impression by saying something, and sometimes one creates as significant an impression by remaining silent.
-Dalai Lama

Offline Palloy

  • Sous Chef
  • ****
  • Posts: 3754
    • View Profile
    • https://palloy.wordpress.com
Re: Fracker Debt Bubble
« Reply #425 on: April 15, 2016, 07:57:45 PM »
Quote
... methane (a greenhouse gas that’s by some estimates 86 times more potent than carbon over a 20-year timeframe) ...

"carbon" should of course read "Carbon dioxide".

Methane (CH4) reacts by combining with Oxygen in the atmosphere to form Carbon dioxide and water.  This happens at a rate proportional to the amount of Methane present, so will be logarithmic - fast at first, and tapering off as time passes.  If the Methane is continually being topped up, then each cohort (the Methane released in one particular time period - say a year, or a day) has to be treated separately and the corresponding time period's results added.

Here is the decay rate for one cohort of Methane, showing its half-life of about 27 years:



Methane is undoubtedly a contributor to Global Warming.  Using 2005 data, it contributed 30% to Total Net Radiative Forcing:

The State is a body of armed men

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 39140
    • View Profile
Re: Fracker Debt Bubble
« Reply #426 on: April 15, 2016, 08:35:33 PM »
Can anyone spot the caveat that negates the entire article?

Why don't you spot it? ???  You're the "expert".   ::)

RE
Save As Many As You Can

Offline Palloy

  • Sous Chef
  • ****
  • Posts: 3754
    • View Profile
    • https://palloy.wordpress.com
Re: Fracker Debt Bubble
« Reply #427 on: May 02, 2016, 11:32:34 PM »
http://www.zerohedge.com/news/2016-05-02/energy-junk-bond-default-rate-just-hit-all-time-high
The Energy Junk Bond Default Rate Just Hit An All Time High
Tyler Durden
05/02/2016 

When we last looked at the soaring default rate among junk bonds issuers just two weeks ago, we noted that the $14 billion in defaults had already pushed the April total to the highest since 2014, while the first quarter was the fifth highest quarterly default total on record.



But it was the stark deterioration within the energy space that we said would promptly push high yield bond defaults within the troubled sector to hit all time highs in very short notice.

That prediction was validated less than a month later because following this weekend's bankruptcies of Ultra Petroleum and Midstate Petroleum which added $3.1 billion to the mushrooming high-yield energy bond default volume tally, in addition to the $1.5 billion of credit facility defaults, the energy high-yield default has soared to a record 13% rate, surpassing the 9.7% mark set in 1999, according to Fitch Ratings.

To be sure, neither of these defaults were a surprise: prior to this weekend, Fitch had a 2016 energy sector default forecast of 20% and included both of these filings in the annual forecast. Furthermore, based on the current bond trading prices of approximately $0.15 for Ultra's $850 million 6.125% bonds due 2024 and $450 million 5.75% bonds due 2018, the market also expects well below-average bond recoveries, something else we have previously highlighted will be a distinct feature of this default cycle.

 

As Fitch goes on to note, Ultra Petroleum cited persistently low natural gas pricing that left it with an unsustainable capital structure as reason for filing. The company plans to use the bankruptcy process to renegotiate unprofitable contracts as well as reduce its $3.7 billion of total bank and bond debt obligations. The $999 million reserve-based credit facility (RBL) at subsidiary borrower Ultra Resources was essentially fully drawn at the time of filing, following a $216 million draw in February 2016.

Ultra's bankruptcy was expected as it followed the expiration of grace periods for interest payments on notes, nonpayment of certain pipeline transportation fees, bank covenant violations and de-listing of the common shares.

Midstates Petroleum's filing affects approximately $1.8 billion of total debt and is based on a pre-arranged plan support agreement with its lenders under the reserve-based revolving credit facility that represents approximately 80% of first lien facility borrowings, along with certain other creditors holding approximately 74% of second lien debt and 77% in principal amount of the third lien debt. The proposed plan incorporates some secured debt paydowns and equity conversion of debt that is junior to the first lien debt. Low commodity prices triggered a liquidity crunch at the company.

Low market trading prices on the bonds portend poor recoveries for unsecured creditors. Midstates's unsecured $294 million, 10.75% senior unsecured bonds, due 2020, and $348 million, 9.25% senior unsecured bonds, due 2021, were bid at $1.875 and $1.75, respectively. The $625 million, 10% second lien notes, due 2020, were bid at $44.625 and the $524 million, 12% third lien notes, due 2020, were bid at eight cents on the dollar.

In more bad news for bank lenders, Midstates, like Ultra borrowed up to the remaining maximum RBL borrowing base in the months leading up to bankruptcy. Midstates drew $249 million under its $750 million RBL in February 2016 to build cash in advance of the bankruptcy filing and the April 2016 re-determination. Full draws of RBLs ahead of restructuring and re-determinations have occurred among some of the most distressed E&P companies as they plan to enter restructuring with this cash liquidity. Linn Energy and W&T Offshore are two other E&P companies that recently fully utilized RBLs.

But this biggest problem for banks is that as more energy companies default should oil prices fail to materially recover, leading to tumbling recoveries across the capital structure and far greater impairments than modeled, the question will once again become one of just who has the greatest committed exposure to the energy sector, especially if as we hinted earlier today, the oil price pattern from last summer reasserts itself and WTI proceeds to slide once more as shale producers resume pumping now that they have been properly hedged following the recent rebound in oil.
The State is a body of armed men

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 39140
    • View Profile
Beleaguered Chesapeake to Sell Off More Assets to Reduce $9B Debt
« Reply #428 on: May 07, 2016, 09:57:24 PM »
No debt?  WTF?

RE

http://oilprice.com/Energy/Natural-Gas/Beleaguered-Chesapeake-to-Sell-Off-More-Assets-to-Reduce-9B-Debt.html

Beleaguered Chesapeake to Sell Off More Assets to Reduce $9B Debt
Shale Drilling Oklahoma


The second-largest producer of natural gas in the United States, Chesapeake Energy Corp., has announced plans to sell part of its Oklahoma shale acreage in order to prop up finances and reduce a massive debt load of around $9.4 billion.

Chesapeake announced yesterday that it would sell around 42,000 acres in the Stack field in Oklahoma, which currently produces around 3,800 barrels of oil equivalent per day.

The assets will go to Newfield Exploration Co. for an estimated price of $470 million.

Furthermore, due to low oil and gas prices, the company will seek to sell additional assets that will bring between $500 million and $1 billion in its coffers by the end of the year.

"We anticipate subsequent divestitures during the second and third quarters," Chief Executive Doug Lawler said in a statement.

Related: U.S. Crude Imports Surge After Long Period Of Decline

Despite these difficulties, the company’s shares were up 12 percent at $6.31 in pre-market trading after the company reported a smaller quarterly loss and cut its production expense forecast for the year. They later traded at $5.97, up 5.7 percent.

The loss narrowed to $964 million over the first three months of the year, down from $3.78 billion in the same period of last year. First quarter revenue also fell by 39 percent to $1.9 billion, whereas analysts’ expectations stood at $2.55 billion. Except for an $853 million impairment charge, the loss in the latest quarter was 10 cents per share, in line with analysts' average estimate.

Related: This Oil Major Seeks To Drive Solar Innovation At Qatar 2022

On Thursday, Chesapeake Energy lowered its forecast for 2016 production costs to $3.40-$3.60 per barrel of oil equivalent from $3.60-$3.80 per boe.

The company dismissed speculation that it was seeking bankruptcy.

"We continue to look at all of our options, including the use of additional secured debt, private transactions with bondholders and other types of exchange offers and open market purchases," said CFO Nick Dell'Osso. To this view, three months ago the company hired a legal counsel to look at all available alternatives in order to strengthen its balance sheet.
Save As Many As You Can

Offline Palloy

  • Sous Chef
  • ****
  • Posts: 3754
    • View Profile
    • https://palloy.wordpress.com
Re: Fracker Debt Bubble
« Reply #429 on: May 12, 2016, 07:33:48 AM »
http://www.zerohedge.com/news/2016-05-12/two-more-energy-companies-go-bankrupt-linn-energy-penn-virgina-file-chapter-11
Two More Energy Companies Go Bankrupt: Linn Energy, Penn Virgina File Chapter 11
Tyler Durden
05/12/2016

According to data compiled by Haynes and Boone, in just the first four months of 2016 there had already been double the amount of bankrupt energy debt than in all of 2015, with the total secured and unsecured defaults rising to $34 billion, double the $17 billion total for all of 2015.

 

We can now add two more major names succumbing to the Saudi onslaught against marginal shale producers when overnightfirst Linn Energy announced a prepackaged Chapter 11 deal, followed by Penn Virginia defaulting just hours later.

In the first case, oil and gas producer Linn Energy LLC filed for chapter 11 bankruptcy after reaching a deal with lenders to restructure its $8.3 billion debt load and obtain $2.2 billion in fresh financing. In its bankruptcy filing press release, Linn announced that the holders of more than 66% of its credit facility have agreed to the “broad terms” of a debt restructuring but didn’t provide further details. The lenders also agreed to let Linn Energy spend the cash securing their debt, known as cash collateral, and to help fund a new $2.2 billion term loan.

LinnCo LLC, a publicly traded affiliate, filed for bankruptcy alongside Linn Energy Wednesday. LinnCo was created to help Linn Energy raise additional equity capital and is taxed as a corporation, rather than as a master limited partnership like Linn Energy.

For those wondering if the bankrtupcy would prevent the company from pumping more oil, bad news: Linn Energy said access to the cash will allow it to continue normal operations without lining up new bankruptcy financing. However, the company still requires permission from the U.S. Bankruptcy Court in Victoria, Texas, to begin spending.

Having obtained creditor consents in advance as part of the prepack, we assume that once the existing equity is wiped out, the company will reemerge with a far smaller debt load. However, a problem may emerge if its partnership status with LinnCo poses a problem for investors. As the WSJ writes, partnerships, as opposed to corporations, take advantage of a structure that allows companies to avoid paying corporate income taxes. Investors’ hunger for yield fueled a boom in these partnerships, which pay out their available cash to investors. Linn Energy led a revival of this status among companies pumping oil and gas and was once the largest energy producer operating as a partnership.

    Such partnerships bankrolled the shale boom, buying up the older, more predictable fields that other drillers were trying to jettison to chase new prospects in flashier shale formations. But the partnerships had to keep buying new fields to keep their output—and cash distributions—growing. Many took on heavy debt loads to fund their acquisitions.

    Even before the price of oil began to slide in 2014, some critics raised questions about whether these companies would be able to keep their promises of steady and growing payouts. An earlier wave of partnerships went bust in 1980s when commodity prices fell. But proponents of the structure argued that more sophisticated hedging markets would allow upstream MLPs to produce reliable streams of cash.

    In an effort to stem the hit to investors, Linn Energy completed an exchange offer last month in which holders of Linn Energy units were given the chance to swap them for stock in LinnCo. Shares in both companies are likely to be wiped out now that they are in bankruptcy, but the swap could address the tax issue for investors.

    Following the April exchange, Linn Energy launched a second, similar exchange offer that is set to expire May 23. In its bankruptcy announcement, Linn Energy said it is going to ask the bankruptcy court to allow unit holders to continue to swap Linn Energy units for LinnCo shares.

    The strategy is largely untested and many are watching to see whether it proves successful for Linn Energy.

The Linn bankruptcy was not a surprise: the company warned in March that a bankruptcy filing may be “unavoidable,” and said last month that it reached a settlement with bondholders on a restructuring that could take place through a chapter 11 reorganization.

* * *

In the day's second bankruptcy, energy producer Penn Virginia also filed for chapter 11 bankruptcy protection Thursday.  And just like Linn, the Pennsylvania-based explorer and producer deals said it had reached a prepackaged agreement with holders of 87%, or $1.03 billion, of its total funded-debt obligations to restructure under chapter 11 protection and eliminate long-term debt by more than $1 billion.

Penn Virginia said it expects to emerge from chapter 11 by the end of the summer.

Penn Virginia’s history dates back to 1882 with its founding as a coal concern in Virginia. It shifted to oil and gas in the 1980s, and more recently has pared its natural-gas holdings in favor of oil fields.

"Like many other exploration and production companies, Penn Virginia has been significantly affected by the recent and continued dramatic decline in oil and natural gas prices,” Interim Chief Executive Edward Cloues said. “We believe using the chapter 11 process is the most efficient way to achieve our financial objectives and deleverage the Company’s balance sheet."

As a result, now that two more energy companies are about to see their interest expense slashed drastically going forward, the only real impact on the company will be that their all in production costs will decline substantially, allowing both to pump more oil at even lower prices, and thus adding to the global supply imbalance, something that will infuriate Saudi Arabia and add even more output to a market that remains chronically oversupplied.
The State is a body of armed men

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 39140
    • View Profile
SandRidge, Breitburn join wave of energy bankruptcy filings
« Reply #430 on: May 16, 2016, 07:13:29 PM »
2 more Bite the Dust.

<a href="http://www.youtube.com/v/rY0WxgSXdEE" target="_blank" class="new_win">http://www.youtube.com/v/rY0WxgSXdEE</a>

RE

http://in.reuters.com/article/us-sandridge-bankruptcy-idINKCN0Y718Y


Deals | Mon May 16, 2016 11:58pm IST
SandRidge, Breitburn join wave of energy bankruptcy filings
By Tom Hals


An electronic display identifies the post that trades SandRidge Energy stock on the floor of the New York Stock Exchange, January 11, 2013. REUTERS/Brendan McDermid

SandRidge Energy Inc (SDOC.PK) and Breitburn Energy Partners LP (BBEP.O) filed for bankruptcy protection on Monday, the latest in a surge of Chapter 11 filings among U.S. energy producers.

The biggest U.S. energy price crash in a generation has now pushed more than 60 North American oil and gas producers to seek protection from creditors since early 2015, regulatory filings show.

As of March 31, SandRidge estimated it had total assets of $7.0 billion and total debt of $4.0 billion, and Breitburn listed assets of $4.7 billion and liabilities of $3.4 billion.

In the past three weeks, producers with about $25 billion in debt have filed for U.S. bankruptcy protection as increasingly larger oil-and-gas companies have succumbed to weak energy prices.

Small oil and gas producers have largely exhausted funding alternatives after issuing more equity and debt and shedding assets over the last two years to stay afloat.

SandRidge reached a pre-packaged bankruptcy pact with lenders. It has agreed on a reserve-based lending facility and a swap of about $3.7 billion of other funded debt for equity.

The Oklahoma City-based company said it expected to fund its operations and capital programs until it emerges from Chapter 11, without the need for debtor-in-possession financing or other additional capital.

SandRidge, which produces oil and gas from shale formations in Oklahoma and Kansas, was founded in 2006 by Tom Ward, who also helped start natural gas company Chesapeake Energy Corp (CHK.N). SandRidge's board ousted Ward, a pioneer of the U.S. fracking boom, as chief executive officer in June 2013 after a fight with activist shareholders.

Breitburn said it secured $75 million in debtor-in-possession financing that, with cash on hand and from operations, would fund its operations during the bankruptcy process.

"Recent asset sales have been terrible and that's why you're seeing this wave of restructuring of debt rather than sales," said Deborah Williamson, a Dykema restructuring attorney in San Antonio. "Creditors seem to be leaning toward a restructuring process that exchanges debt for new equity ownership and waiting out a recovery in oil prices."

Few struggling energy companies have been able to find buyers, although there was a rare exception on Monday as Range Resources Corp said it will buy fellow natural gas producer Memorial Resource Development Corp (MRD.O) for about $3.3 billion in stock.

Recent bankruptcy filings include Linn Energy LLC (LINE.O), Penn Virginia Corp PVAH.PK, Chaparral Energy Inc CHARN.UL, Midstates Petroleum Co Inc (MPOYQ.PK) and Ultra Petroleum Corp (UPLMQ.PK).

Although oil prices hit a six-month high on Monday, stocks of financially distressed energy producers were lower.

Shares of Exco Resources Inc (XCO.N) were down sharply for a second day after it said on Friday it would evaluate alternatives, including bankruptcy.

Canadian oil and gas producer Penn West Petroleum Ltd (PWT.TO)(PWE.N) on Monday raised doubts about its ability to continue, sending its stock down 22 percent.

Shares of Stone Energy Corp (SGY.N) and Warren Resources Inc (WRES.O) were both down more than 4 percent.

Debt-laden Chesapeake, the second-largest U.S. natural gas producer, said last week it would issue 4 percent of its outstanding shares in exchange for notes.

(Reporting by Arathy S Nair in Bengaluru; Tom Hals in Wilmington, Delaware; Tracy Rucinski in Chicago; Editing by Lisa Von Ahn and Alan Crosby)
Save As Many As You Can

Offline MKing

  • Contrarian
  • Sous Chef
  • *
  • Posts: 3354
    • View Profile
Re: Fracker Debt Bubble
« Reply #431 on: May 16, 2016, 07:40:40 PM »
...and in all the hubbub....the kind of business model I have expounded on at length around here...slips by quietly....just as it should...


http://www.reuters.com/article/us-mem-resource-dev-m-a-range-resource-idUSKCN0Y70ZS
Sometimes one creates a dynamic impression by saying something, and sometimes one creates as significant an impression by remaining silent.
-Dalai Lama

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 39140
    • View Profile
Why Cheap Shale Gas Will End Soon?
« Reply #432 on: May 25, 2016, 12:22:55 PM »
Art predicts NG prices will rise.  What if the customers don't have money to afford the higher prices?

RE

http://oilprice.com/Energy/Energy-General/Why-Cheap-Shale-Gas-Will-End-Soon.html

Why Cheap Shale Gas Will End Soon

 
 
 
 
 
Shale Gas

Enthusiasts believe that shale gas is simultaneously cheap, abundant and profitable thus defying all rules of business and economics. That is magical thinking.

The recently released EIA Annual Energy Outlook 2016 sparkles with pixie dust as it forecasts almost unlimited gas supply at low prices out to 2040 and beyond. Exuberant press reports herald a new era of LNG exports that will change the geopolitical balance of the world and make America great again.

But U.S. shale gas production is declining because of low prices and shale gas companies are in deep financial trouble because in the real world, price and cost matter.

That is not magical.

First Quarter 2016 Financial Performance

The financial performance of shale gas-weighted E&P companies in the first quarter of 2016 was a disaster.

Chesapeake Energy, the biggest shale gas producer in the world, had negative cash from operations. That means that oil and gas sales didn’t even cover operating costs much less capital expenditures like drilling and completion.

Other shale gas-weighted companies including Anadarko, Comstock and Petroquest also had negative cash from operations. Goodrich and Sandridge are in bankruptcy and Exco and Halcon will soon follow. Ultra, Forest, Quicksilver, Swift and Talisman were lost in action last year.

On average, surviving companies out-spent cash flow by two-to-one both in 2015 and 2016 but many normally strong companies greatly increased negative cash flow this year (Figure 1).

(Click to enlarge)

Figure 1. First quarter 2016 and full-year 2015 shale gas E&P company capex-to-cash flow ratios. Source: Google Finance and Labyrinth Consulting Services, Inc.

Devon Energy has been cash-flow neutral through much of the shale gas revolution but disturbingly increased capex-to-cash flow 5-fold in the first quarter of 2016. Similarly, Southwestern Energy has had an excellent record of near-cash flow neutrality but doubled its negative cash flow in 2016.

The debt side of first quarter earnings is far more disturbing. The average debt-to-cash flow ratio for shale gas companies increased almost 4-fold to more than 7, up from less than 2 in 2015 (Figure 2).

(Click to enlarge)

Figure 2. First quarter 2016 and full-year 2015 shale gas E&P company debt-to-cash flow ratios. Source: Google Finance and Labyrinth Consulting Services, Inc.

Devon’s debt-to-cash flow was more than 21 and Southwestern’s, more than 17. Gas prices below $3 cannot be sustained without damaging the balance sheets and income statements of even well-managed companies.

Debt-to-cash flow is a critical determinant of risk from a bank’s perspective because it measures how many years it would take to pay off debt if 100 percent of cash from operations were used for this purpose. This means that it would take these companies an average of 7 years to pay down their total debt using all cash from operating activities.

The energy industry average from 1992-2012 was 1.53 and 2.0 was a standard threshold for banks to call loans based on debt-covenant agreements. That threshold increased in recent years to about 4 but 7 years to pay off debt is clearly beyond reasonable bank exposure risk.

Low Gas Prices and Declining Production

Shale gas is the principal support for all U.S. gas production since conventional gas is in terminal decline. U.S. dry gas production has declined almost 1 Bcf per day since September 2015 largely because of low gas prices (Figure 3).

(Click to enlarge)

Figure 3. U.S. dry gas production and Henry Hub price. Source: EIA May 2016 STEO and Labyrinth Consulting Services, Inc.

Henry Hub gas prices have fallen for the last 2 years from more than $6/mmBtu in January 2014 to $2 today and prices have been below $3/mmBtu since early 2015. A similar gas-price decline occurred from June 2011 to April 2012 (Figure 3). Then, dry gas production fell when prices dropped below $3/mmBtu.

$3 is well below the break-even gas price for any operator in any play. Even in the Marcellus–the most commercially attractive shale gas play–break-even prices are more than $3 (Table 1).

Table 1. Marcellus break-even gas prices. COG: Cabot, CHK: Chesapeake. Source: Drilling Info and Labyrinth Consulting Services, Inc.

Shale gas production has fallen 0.83 Bcf/d since February 2016 (Figure 4).

(Click to enlarge)

Figure 4. Shale gas production. Source: EIA Natural Gas Weekly and Labyrinth Consulting Services, Inc.

All plays have declined from their respective peaks except the Utica Shale. Marcellus production accounts for more than a third (-0.36 Bcf/d) of shale gas decline in 2016. There is certainly no shortage of supply in that play but low prices and related delays in pipeline commitments have taken their toll on production.

Related: Is OPEC A U.S. National Security Threat?

There are no longer any horizontal rigs drilling in the Barnett or Fayetteville, plays that were supposed to help provide the U.S. with 100 years of gas supply. That is the intersection of magical thinking and low gas prices.

Higher Gas Prices Are Likely

Lower gas production along with increased consumption and exports spell higher gas prices later in 2016 and in 2017. Latest data from EIA corroborate the impending late 2016 supply deficit that I wrote about last month (Figure 5).

(Click to enlarge)

Figure 5. U.S. dry gas supply balance and forecast. Source: EIA May 2016 STEO and Labyrinth Consulting Services, Inc.

A supply deficit does not mean that there won’t be enough gas but will require more extensive withdrawals from inventory and that will move prices higher. During the last supply deficit in 2013 and through much of 2014, Henry Hub spot prices increased from $2 at the peak of the previous surplus to more than $6 per mmBtu and averaged $4.05.

Comparative inventory (C.I.) is determined by comparing current stocks with a moving average of stocks over the past 5 years. There is a strong negative correlation between C.I. and natural gas price (Figure 6).

(Click to enlarge)

Figure 6. Natural gas comparative inventory vs. Henry Hub price. Source: EIA and Labyrinth Consulting Services, Inc.

The same June 2011-April 2012 price decline shown in Figure 5 correlates with a strong increase in C.I. in Figure 6. In February 2012, C.I. turned around abruptly and prices responded quickly.

Similarly, the February 2014-March 2016 price decline in Figure 5 correlates with a C.I. increase in Figure 6. That build has slowed in recent weeks and C.I. will probably begin falling as production continues to flatten and decline.

During the period of C.I. surplus from October 2011-March 2013, gas prices averaged less than $3 just as they have during the present period of C.I. surplus since February 2015. I expect prices to move above $3 as the winter heating season begins. A possible temporary price drop in September would be consistent with previous periods when ample winter storage levels are reached after the U.S. Labor Day (J.M.Bodell, personal communication).

Shale Gas Magical Thinking: Price and Cost Matter

Shale gas made sense in the first decade of this century when real gas prices averaged almost $7/mmBtu (Figure 7). That was because there was a supply deficit as conventional production declined before shale gas supply increased to replace it.

(Click to enlarge)

Figure 7. CPI-adjusted U.S. natural gas prices, 1976-2016 (April 2016 U.S. dollars. Source: EIA, U.S. Department of Labor Statistics and Labyrinth Consulting Services, Inc.

Since 2009, however, prices have averaged only $3.81 and that is less than the break-even price for core areas of any play except the Marcellus (Table 2).

Table 2. Shale gas break-even gas price summary. Source: Drilling Info and Labyrinth Consulting Services, Inc

Shale gas enthusiasts have embraced point-forward economics that ignore many important non-capital costs of doing business. That is the difference between the break-even prices in Table 2 and lower estimates found in many analyst reports.

The EIA magically forecasts that shale gas production will increase from almost 40 Bcfd in 2016 to almost 70 Bcfd by 2030 at $5 (2015 dollars) gas prices; it will increase to almost 80 Bcfd by 2040 at prices below $5 per mmBtu.

The prices in Table 2 are for the core areas of the plays–much higher prices will be necessary to produce the marginal areas needed to support supply after core areas are fully developed. Although I respect EIA’s work and do not hold them to a very high standard on long-term forecasts, this view of the future of shale gas is not helpful.

Related: Key Pipeline Could Unleash Alberta’s Oil Sands

Falling gas prices have exposed the delusion of shale gas magical thinking. Production growth was funded by debt. Capital in search of yield continued to flow and over-production pushed prices below $2 by the end of 2015.

The wreckage is clear from disastrous first quarter financial data and falling production. The Barnett and Fayetteville plays that were supposed to last 100 years are dead at current prices. The Haynesville will probably follow soon enough.

Capital may continue to flow to shale gas companies but most of it will be used to repair balance sheets. Prices will gradually increase and financially stronger companies with core positions in the Marcellus and Utica plays will survive. Many companies will not.

The U.S. has perhaps a decade of gas supply at about $6 and considerably more at higher prices. By the time prices reach those levels, the folly of export will be apparent.

Art Berman for Oilprice.com

Save As Many As You Can

Offline MattS

  • Contrarian
  • Bussing Staff
  • *
  • Posts: 73
    • View Profile
Re: Why Cheap Shale Gas Will End Soon?
« Reply #433 on: May 25, 2016, 12:30:42 PM »
Art predicts NG prices will rise.  What if the customers don't have money to afford the higher prices?

RE

http://oilprice.com/Energy/Energy-General/Why-Cheap-Shale-Gas-Will-End-Soon.html

<h1>Why Cheap Shale Gas Will End Soon</h1>

So does the EIA.

Page/Slide 50. Looks like it goes up to about $5/mcf, and stays there on the backs of the shale gas revolution out through 2040. Also, the US becomes a net energy exporter within 3 years. First time since the 1950's. Wasn't it Nixon who first whined about energy independence? Or was it Carter? In either case, quite a surprise.

http://www.eia.gov/forecasts/aeo/er/pdf/0383er%282016%29.pdf

Offline RE

  • Administrator
  • Chief Cook & Bottlewasher
  • *****
  • Posts: 39140
    • View Profile
Re: Why Cheap Shale Gas Will End Soon?
« Reply #434 on: May 25, 2016, 12:51:43 PM »

So does the EIA.


RE
Save As Many As You Can

 

Related Topics

  Subject / Started by Replies Last post
7 Replies
2527 Views
Last post December 08, 2014, 01:57:48 AM
by jackbrouno
1 Replies
909 Views
Last post November 09, 2015, 04:01:03 PM
by MKing
9 Replies
1073 Views
Last post January 13, 2018, 12:19:00 AM
by RE