AuthorTopic: Fracker Debt Bubble  (Read 108630 times)

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🛢️ Big Oil's Message to Permian Strugglers: We Won't Bail You Out
« Reply #450 on: May 31, 2019, 12:24:44 AM »
Guaranteed though, Da Goobermint will bail out Big Oil.  ::)


Big Oil's Message to Permian Strugglers: We Won't Bail You Out
By Kevin Crowley
May 30, 2019, 11:09 AM AKDT

    Exxon, Conoco warn of would-be sellers asking for too much
    Chevron walked away from Anadarko; Shell yet to strike deal


Big Oil probably won’t be buying up the Permian Basin’s struggling independent drillers any time soon.

Years of costly exploration and frantic buying sprees have gutted shareholder returns in the world’s largest shale basin. And management teams and their financial backers can’t count on shale-hungry, cash-rich supermajors to buy them out.

Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp. and ConocoPhillips are all on record saying they are wary of scooping up smaller rivals at a time when would-be sellers are demanding premium payouts and global crude prices are under pressure from ample supplies.

There is “not always alignment among buyers and sellers,” Exxon Chief Executive Officer Darren Woods said Wednesday. He suggested Permian drillers may have to be squeezed by weak prices for a bit longer before they dial down their expectations.

“That’s often the case in a market, particularly in one that’s in transition,” Woods said.

Conoco CEO Ryan Lance has a similar view. There are “a lot of bid-ask issues sitting in the market today,” he said on May 23. “Expectations change” is what’s needed to stoke acquisition activity.

Shell has been on the hunt to bulk up in the Permian for some months but has yet to seal a deal. The Anglo-Dutch major was said to be in talks with privately-owned producer Endeavor Energy Resources LP in January.

Chevron walked away from buying Anadarko Petroleum Corp. earlier this month after being outbid by Occidental Petroleum Corp. “We’re serious about being disciplined,” Chevron CEO Mike Wirth said.

Occidental may have ended up with a winner’s curse. Carl Icahn, the billionaire investor, sued Occidental on Thursday for its “fundamentally misguided and hugely overpriced” bid for Anadarko.

It is said that you can’t manage what you can’t measure. Measuring the wrong thing can be just as bad, though. Especially if, as in the case of the oil business, what’s being measured is each other.

Without wishing to harass the afflicted, I wrote the other day about how desperately unpopular the energy sector is among investors. Remarkably, its pariah status has been cemented further in the brief interlude since. As of Thursday morning, its weighting in the S&P 500 index stood at just 5%, the lowest since at least 1990.

The energy sector's weight in the S&P 500 index has hit a historic low, despite the recovery in oil prices over the past two years

Source: Bloomberg

There are clouds hanging over the sector’s future, be it generic things like trade wars or specific challenges like surging shale supply and climate change. But there is also a pernicious legacy of excessive investment, lousy returns on that investment and, consequently, little cash making its way back to investors. At the heart of this is a compensation culture that has long encouraged growth at all costs and skewed rewards in favor of management. And at the heart of that is something meant to keep everyone aligned and on their toes: total shareholder return.

The bulk of executive pay, roughly two-thirds on average, consists of long-term awards like restricted stock units that vest over time. These awards are tied overwhelmingly to total shareholder return, which measures the gain or loss an investor makes from a stock’s performance, as well as any dividends in a certain period of time. Doug Terreson, the lead analyst on the integrated oil sector for Evercore ISI, has been tracking pay trends in detail for several years. Based on the latest proxy filings, he calculates relative total shareholder return determines 56% of long-term pay for CEOs at the majors and 81% for those running exploration and production companies.

That word “relative” is all important.

Boards at oil companies choose a peer group and then measure how their firm’s stock performed in relative terms when setting pay. What that means, of course, is that the whole sector can do terribly, but if the company’s stock was the best of the worst, then the CEO can still be rewarded handsomely. Taking just a second to remind ourselves that energy has slumped to 5% of the stock market, the problem with this Möbius-strip approach to compensation becomes crystal clear.
Standard Issue

Oil companies benchmark returns among themselves, while the broader stock-market trounces them

Source: Evercore ISI

The sector stands out in this regard. Terreson writes that while almost every materials, technology and industrial company uses the S&P 500 as a comparison and/or measures of absolute value in setting CEO pay, “these features are conspicuously absent from Big Oil and E&P CEO pay plans.” Not unrelated to this, the industry lags in return on capital, too:
Cause And Effect

Dismal return on capital employed means there's little rationale for investors to hold energy stocks - so many of them aren't

Source: Evercore ISI

Chevron Corp. is the only one of the oil companies Terreson tracks that uses the S&P 500 as a peer in setting long-term pay, albeit with a weighting of just 20% in the total shareholder return compensation bucket (the other 80% uses its big oil peers).

One objection raised against benchmarking relative to the S&P 500 is that oil’s volatility just means it’s different from other industries and makes it hard to normalize for commodity prices in setting CEO pay. But this is undercut by two things. First, there is ample empirical evidence that oil-sector compensation rewards management in the good times but shields them when the cycle turns down. Moreover, if companies can normalize for oil prices in drawing up capital budgets, then it isn’t clear why they can’t do so when setting incentives for management.

But back to that 5% figure. Because it renders debates about the theoretical pluses and minuses of using the S&P 500 as a benchmark moot. Quite clearly, investors are already using it as a benchmark. This reflects a broader change, as the mindset has switched from concerns about energy scarcity to expectations of abundance. Oil’s x-factor has been lost, as current insouciance in the face of rising geopolitical tensions captures, making energy just another sector competing among many. The longer oil companies remain wedded to using each other to judge how they’re doing, the more they will merely validate investors’ reluctance.
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🛢️ Shale Pioneer: Fracking is an “Unmitigated Disaster”
« Reply #451 on: June 25, 2019, 05:42:25 AM »

Shale Pioneer: Fracking is an “Unmitigated Disaster”
By Nick Cunningham - Jun 24, 2019, 6:00 PM CDT

Fracking has been an “unmitigated disaster” for shale companies themselves, according to a prominent former shale executive.

“The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions,” Steve Schlotterbeck, former chief executive of EQT, a shale gas giant, said at a petrochemicals conference in Pittsburgh. “In fact, I'm not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change.”

He did not pull any punches. “While hundreds of billions of dollars of benefits have accrued to hundreds of millions of people, the amount of shareholder value destruction registers in the hundreds of billions of dollars,” he said. “The industry is self-destructive.”

The message is not a new one. The shale industry has been burning through capital for years, posting mountains of red ink. One estimate from the Wall Street Journal found that over the past decade, the top 40 independent U.S. shale companies burned through $200 billion more than they earned. A 2017 estimate from the WSJ found $280 billion in negative cash flow between 2010 and 2017. It’s incredible when you think about it – despite the record levels of oil and gas production, the industry is in the hole by roughly a quarter of a trillion dollars.

The red ink has continued right up to the present, and the most recent downturn in oil prices could lead to more losses in the second quarter.

So, questionable economics is not exactly breaking news when it comes to shale. But the fact that a prominent former shale executive – who presided over one of the largest shale gas companies in the country – called out the industry face-to-face, raised some eyebrows, to say the least. “In a little more than a decade, most of these companies just destroyed a very large percentage of their companies' value that they had at the beginning of the shale revolution,” Schlotterbeck said. “It's frankly hard to imagine the scope of the value destruction that has occurred. And it continues.”

“Nearly every American has benefited from shale gas, with one big exception,” he said, “the shale gas investors.”’
Related: China Launches World’s First Smart Oil Tanker

The industry is at a bit of a crossroads with Wall Street losing faith and interest, finally recognizing the failed dreams of fracking. The Wall Street Journal reports that Pioneer Natural Resources, often cited as one of the strongest shale drillers in Texas, is largely giving up on growth and instead aiming to be a modest-sized driller that can hand money back to shareholders. “We lost the growth investors,” Pioneer’s CEO Scott Sheffield said in a WSJ interview. “Now we’ve got to attract a whole other set of investors.”

Sheffield has decided to slash Pioneer’s workforce and slow down on the pace of drilling. Pioneer has been bedeviled by disappointing production from some of its wells and higher-than-expected costs.

But, as Schlotterbeck told the industry conference in Pittsburgh, the problem with fracking runs deep. While shale E&Ps have succeeded in boosting oil and gas production to levels that were unthinkable only a few years ago, prices have crashed precisely because of the surge of supply. And, because wells decline at a precipitous rate, capital-intensive drilling ultimately leaves companies on a spending treadmill.

Meanwhile, as the financial scrutiny increases on the industry, so does the public health impact. A new report that studied over 1,700 articles from peer-reviewed journals found harmful impacts on health and the environment. Specifically, 69 percent of the studies found potential or actual evidence of water contamination associated with fracking; 87 percent found air quality problems; and 84 percent found harm or potential harm on human health.

The health impacts have been a point of controversy for years, pitting the industry against local communities. The industry largely won the tug-of-war over fracking, beating back federal and state efforts to regulate it. However, the story is not over.
Related: Philadelphia Refinery Explosion To Boost Gasoline Prices

In many cases, there is an abundance of anecdotal evidence pointing to serious health impacts, but peer-reviewed research takes time and has lagged behind the incredible rate of drilling. Now, the public health research is starting to catch up. Of the more than 1,700 peer-reviewed studies looking at these issues, more than half have been published since 2016.

One need not be an opponent of fracking to recognize that this presents a threat to the industry. For instance, a spike of a rare form of cancer has cropped up in southwestern Pennsylvania recently. The causes are unclear, but some public health advocates and environmental groups are pointing the finger at shale gas drilling, and have called on the governor to stop issuing new drilling permits. The Marcellus Shale Coalition, an industry group, said the request was “ridiculous.” The region is right at the heart of high levels of shale drilling, so any regulatory action coming in response the public health outcry could impact drilling operations. Time will tell.

In the meantime, poor financials are the largest drag on the shale sector. “And at $2 even the mighty Marcellus does not make economic sense,” Steve Schlotterbeck, the former EQT executive said at the conference. “There will be a reckoning and the only questions is whether it happens in a controlled manner or whether it comes as an unexpected shock to the system.”

By Nick Cunningham,
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Re: 🛢️ Shale Pioneer: Fracking is an “Unmitigated Disaster”
« Reply #452 on: June 25, 2019, 07:27:27 PM »

Shale Pioneer: Fracking is an “Unmitigated Disaster”

“Nearly every American has benefited from shale gas, with one big exception,” he said, “the shale gas investors.”’

No one who has followed petrochemical news in this forum can possible be surprised. Capex-intensive and value-destructive.
Now let's just rollover our debts into a new set of loans...
"It is difficult to write a paradiso when all the superficial indications are that you ought to write an apocalypse." -Ezra Pound

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Re: 🛢️ Shale Pioneer: Fracking is an “Unmitigated Disaster”
« Reply #453 on: June 25, 2019, 09:42:10 PM »

Shale Pioneer: Fracking is an “Unmitigated Disaster”

“Nearly every American has benefited from shale gas, with one big exception,” he said, “the shale gas investors.”’

No one who has followed petrochemical news in this forum can possible be surprised. Capex-intensive and value-destructive.
Now let's just rollover our debts into a new set of loans...

<a href="" target="_blank" class="new_win"></a>
Under ideal conditions of temperature and pressure the organism will grow without limit.

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🛢️ Shale Executive Sees “Another Round Of Bankruptcies” Looming
« Reply #454 on: June 28, 2019, 01:28:17 AM »

Shale Executive Sees “Another Round Of Bankruptcies” Looming
By Nick Cunningham - Jun 27, 2019, 4:00 PM CDT

The recent downturn in oil prices forced a slowdown in the U.S. shale industry, and top executives appear to be gloomier than ever. 

According to a survey by the Dallas Federal Reserve, the business activity index in Texas fell to -0.6 in the second quarter, down from a positive reading of 10.8 in the first quarter. A negative reading means that business activity actually contracted from the prior quarter, offering evidence that the slide in oil prices led to a pullback in spending and drilling.

While oil and gas production continued to rise in the second quarter, it did so at a slower pace than in months past. The Dallas Fed said that its spending index actually fell into negative territory, again, an indication of contraction.

A slowdown in drilling is felt most acutely by oilfield services companies, who make their money from drilling volume and activity, rather than from oil sales. Not only did activity dip, but the prices that oilfield services charge for their services fell sharply, and margins were “notably lower” in the second quarter, the Dallas Fed said.

Employment and wages also contracted. The Dallas Fed offers indices on “company outlook,” indices that further highlight the rising pessimism among most firms. The “aggregate uncertainty index” showed a surge of uncertainty from the sector, and it posted the highest reading since 2017.

In short, conditions appeared to have deteriorated in the second quarter, even as the industry posted a “gusher of red ink” in the first.

While the indices offer some quantitative data to back up the souring outlook for U.S. shale, the metrics are also a bit high-level and abstract. The real color comes in the comments section of the Dallas Fed survey, where comments are anonymously submitted by oil and gas executives. These statements offer better clues into what’s really going on at the ground level. 
Related: Is Hydrogen The New LNG?

For instance, one executive said that the oil price downturn in the second quarter has had a dramatic effect on industry conditions. The “biggest impact has been the rapid and accelerating lack of investor interest in both conventional and unconventional oil and gas. The securities of oil and gas companies now sell at a fraction of what they once commanded. Huge losses in these shares hamper new exploration. It looks like another round of bankruptcies and mergers,” the executive said.

There were countless others that offered similar sentiments. “It is very true that cash is drying up, and it is going to be hard to get financing to drill our wells,” one person wrote.

Meanwhile, the tidal wave of new natural gas supply crashed prices in West Texas last year, and Waha prices have at times fallen into negative territory. Flaring has spiked as a result of a lack of pipelines. Conventional wisdom says weak gas prices barely impact drillers because companies are really targeting oil. But apparently not everyone is immune to rock-bottom gas prices. “We had to shut-in a large natural gas field due to Waha Hub negative pricing,” one company executive said in the Dallas Fed survey.

Yet another called for “a conversation” about government regulation, perhaps mirroring the mandatory production cuts seen in Alberta this year. “We need to start a conversation between industry and government about bringing back pro-rationing (daily production allowables and monthly market factors) again. Nobody’s generating free cash flow,” the comment said.
Related: Failing Trade Talks Could Send Oil To $30

Notably, a few outside forces are also having a negative impact on Permian drillers. One person said that “tariffs are raising prices of steel and other services and are a disastrous tool of the current regime in Washington,” while another person said that the increase in interest rates from the U.S. Federal Reserve was “cutting cash-flows.” Another voiced concerns about rising uncertainty due to the U.S. presidential election.

The only positive for the sector as of late is that oil prices have rebounded, with WTI moving back to the high-$50s per barrel on the back of Middle East tension and a sudden decline in inventories. Still, the shale sector was unprofitable at roughly those levels in the first quarter, and by all accounts, drillers continue to burn through cash. In fact, according to Rystad Energy, the return on investment from oil and gas wells in the Permian peaked in 2017.

The OPEC+ extension is likely in the bag, but that may only put a floor beneath prices, rather than leading to a more significant rally. With weak demand and supply continuing to rise, albeit at a slower rate, there is little reason for shale executives to feel optimistic.

By Nick Cunningham of
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🛢️ This Shale Fracker's Decision to Sell Says It All
« Reply #455 on: July 16, 2019, 01:35:35 AM »

This Shale Fracker's Decision to Sell Says It All

Carrizo bailing out at the bottom shows just how desperately the E&P sector needs to consolidate.
By Liam Denning
July 15, 2019, 7:09 AM AKDT

Shale fracking is a fragmented world. Photographer: Bloomberg/Bloomberg

A big deal in the Permian basin should be cause for fanfare in oil and gas circles. And yet, a distinct sad-trombone note sounds as Carrizo Oil & Gas Inc. falls into the arms of Callon Petroleum Co.

Callon is offering a 25% premium in an all-stock acquisition, based on Friday’s closing prices. But it’s the absolute price that tells the real story. Carrizo is selling out for $13.12 a share, getting it back to where it traded just less than three months ago – and way below the $23 level where it sold a slug of new shares last August. If Callon is engaging in some bottom-fishing, Carrizo is nonetheless grabbing eagerly at hook, line and sinker.
Timing Is Everything

Carrizo is selling to Callon at a low point

Source: Bloomberg

Carrizo’s decision to sell with its stock trading close to its lowest levels in a decade is the salient fact here. It is being paid with stock and its shareholders will own 46% of the enlarged Callon, so they can participate in any gains once the deal is done. They’re better off not looking too closely at their screens on Monday, though: Callon’s stock slumped by as much as 17% Monday morning, wiping out the implied premium.

Even so, there is a compelling logic to shale consolidation. A decade of breakneck expansion has left the onshore U.S. exploration and production business overcapitalized, with a long tail of inefficient smaller companies offering lackluster returns (see this). Carrizo is a prime example. Its total return over the past five years is negative 84%, which makes the sector’s negative 64% look good (the S&P 500 has returned a positive 69% in that time). Indeed, activist firm Kimmeridge Energy Management Co. tried last year to nudge the company into streamlining or selling itself to address this. Carrizo, which was trading at about $17 a share back then, disagreed.

It is telling that up to $45 million of Callon’s synergies target relates to cutting general and administrative overhead. That is equivalent to more than two-thirds of Carrizo’s G&A line, reinforcing one of Kimmeridge’s lines of argument about the inefficiency inherent in such a fragmented industry.

Those cash savings also speak to the other key point in Callon’s marketing push, namely an implied free cash flow number north of $200 million in 2020. Based on Callon’s current price, that implies a pro forma free cash flow yield of about 10%, which may be enough to tempt some investors back into the stock when the smoke clears – although pro forma net debt of two times Ebitda (including synergies) means some of that will have to go toward reducing leverage.

Proving those synergies work and that free cash flow will actually find its way to shareholders is Callon’s main task now. The company hasn’t had a single year of positive free cash flow since 2010, according to figures compiled by Bloomberg. And its own total return has been negative 41% over the past five years – better than Carrizo but still far to the wrong side of zero.

That is the problem with E&P as a whole. Carrizo will hardly be missed by investors, and wringing out some costs would be a good thing. Yet the very fact that Carrizo has chosen to take this price at this time, rather than the usual E&P playbook of banking on the next upswing, says a lot.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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🛢️ U.S. Shale Is Doomed No Matter What They Do
« Reply #456 on: Today at 12:11:59 AM »

U.S. Shale Is Doomed No Matter What They Do
By Nick Cunningham - Jul 21, 2019, 4:00 PM CDT

With financial stress setting in for U.S. shale companies, some are trying to drill their way out of the problem, while others are hoping to boost profitability by cutting costs and implementing spending restraint. Both approaches are riddled with risk.

“Turbulence and desperation are roiling the struggling fracking industry,” Kathy Hipple and Tom Sanzillo wrote in a note for the Institute for Energy Economics and Financial Analysis (IEEFA).

They point to the example of EQT, the largest natural gas producer in the United States. A corporate struggle over control of the company reached a conclusion recently, with the Toby and Derek Rice seizing power. The Rice brothers sold their company, Rice Energy, to EQT in 2017. But they launched a bid to take over EQT last year, arguing that the company’s leadership had failed investors. The Rice brothers convinced shareholders that they could steer the company in a better direction promising $500 million in free cash flow within two years.

Their bet hinged on more aggressive drilling while simultaneously reducing costs. Their strategy also depends on “new, unproven, expensive technology, electric frack fleets,” IEEFA argued. “This seems like more of the same – big risky capital expenditures.”

EQT’s former CEO Steve Schlotterbeck recently made headlines when he called fracking an “unmitigated disaster” because it helped crash prices and produce mountains of red ink. “In fact, I'm not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change,” Schlotterbeck said at an industry conference in June.
Related: Will The U.S Gas Glut Cap Oil Production?

IEEFA draws a contrast between Schlotterbeck and the Rice brothers. While the latter wants advocates a strategy of stepping up drilling in an effort to grow their way out of the problem, the former argues that this approach has been tried over and over with poor results. Instead, Schlotterbeck said that drillers need to cut spending and production, which could revive natural gas prices.

But while the philosophies differ – relentless growth versus restraint – IEEFA argues that “neither of these strategies seem viable.” On the one hand, natural gas prices are expected to stay below $3 per MMBtu, a price that is unlikely to lead to profits, IEEFA says. That is especially true if shale companies aggressively spend and produce more gas.

However, a strategy of restraint may not work either. “[E]ven if natural gas producers coordinate their activities and reduce supply—a highly unlikely prospect—Schlotterbeck’s expectation that natural gas prices would inevitably rise is questionable,” IEEFA analysts wrote.

There are few reasons why natural gas prices might not rebound. For instance, any increase in natural gas prices will only induce more renewable energy. Costs for solar, wind and even energy storage has plunged. For years, natural gas was the cheapest option, but that is no longer the case. Renewable energy increasingly beats out gas on price, which means that natural gas prices will run into resistance when they start to rise as demand would inevitably slow.

A second reason why prices might not rise is because public policy is beginning to really work against the gas industry. IEEFA pointed to the recent decision in New York to block the construction of Williams Co.’s pipeline that would have connected Appalachian gas to New York City. In fact, New York seems to be heading in a different direction, recently passing one of the most ambitious and comprehensive pieces of climate and energy bills in the nation. Or, look to Berkeley, California, which just became the first city in the country to ban the installation of natural gas lines in new homes. As public policy increasingly targets the demand side of the equation, natural gas prices face downward pressure.
Related: The Biggest Challenges Facing America’s Nuclear Sector

Another complication for natural gas producers is that the petrochemical industry, which is attracting tens billions of dollars in investment due to the belief that natural gas will remain cheap in perpetuity. Gas producers, who want higher prices, are in conflict with petrochemical manufacturers, who need cheap feedstocks.

“Companies like Shell, which is considering a $6 billion petrochemical investment, must choose: absorb a higher price cost structure for natural gas liquids (NGLs) needed to produce its product, while facing stiff global competition in the petrochemical business. Or, intensify capital commitments and take over the fracking business, hoping to find synergies through integration,” IEEFA noted. “Both of these scenarios change the risk profile Shell has described to justify its aggressive expansion plans in the Ohio Valley.”

The upshot is that while companies like EQT undertake a major shift in strategy, the road ahead remains rocky either way. “More bankruptcies are all but certain as oil and gas borrowers must repay or refinance several hundred billion dollars of debt over the next six months,” IEEFA concluded.

By Nick Cunningham of
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