Posted on 01/24/2016 9:15:19 AM PST by Lorianne
The boom years left the US oil industry deep in debt. The 60 leading US independent oil and gas companies have total net debt of $206bn, from about $100bn at the end of 2006. As of September, about a dozen had debts that were more than 20 times their earnings before interest, tax, depreciation and amortisation. Worries about the health of these companies have been rising. A Bank of America Merrill Lynch index of high-yield energy bonds, which includes many indebted oil companies, has an average yield of more than 19%. Almost a third of the 155 US oil and gas companies covered by Standard & Poor’s are rated B-minus or below, meaning they are at high risk of default.
The number of rigs drilling oil wells in the US has dropped 68% from the peak in October 2014 to 510 this week, and it is likely to fall further. So far, the impact on US oil production has been minimal. Output in October was down 4% from April, as hard-pressed companies squeeze as much revenue as possible out of their assets. Saudi Arabia’s strategy of allowing oil prices to fall to curb competing sources of production appears to be succeeding But Harold Hamm, chief executive of Continental Resources, one of the pioneers of the shale boom, says the downturn in activity is likely to intensify. “We’re seeing capex being slashed to almost nothing,†he says. “At low prices, people aren’t going to keep producing.†He expects US oil production to fall sharply this year, and says people may be surprised by how fast it goes.
(Excerpt) Read more at ft.com ...
It needs to get to over $ 45.00 per barrel to be profitable. It is already destroying high paying job in huge numbers. Of course it happens fast just stop the pumps, save for when it is profitable.
The Saudi plan in action. However Americans will survive it!
It should be called an oil bong similar to what is called a beer bong by our future socialist leaders in universities. An oil bong is being fed to the West by foreign enemies and domestic political leaders in trade and government.
It doesn’t pay to frack further at these prices.
Once a well is fracked, it produces a lot more at first, and then tapers pretty quick. There is about a year, maybe two, of high production - after that it is more like a trickle.
So as the previously fracked wells start declining with very few new ones replacing them, shale production will plummet.
We are a year into the slowdown in fracking, and the slowdown has been accelerating. Now that prices have dropped firmly below the “shale band” of $45-$65, new fracking is halting.
If prices stay this low, the production from earlier fracked wells is nearing their normal production declines, and will pretty much follow the last year’s curve of the declines in drilling and fracking. Then it will fall off the cliff from the virtual halt now starting.
At $30, American fracking will shut down. The longer the bust lasts, the slower the recovery of production will take, as people find new jobs, equipment is scrapped, and other assets are re-purposed.
Energy companies had to go in debt to buy land, equipment, and personnel quickly or else they would not have been able to compete.
This necessarily led to a glut of oil and the inevitable collapse.
The only people that made out were the people at the bottom who saved as much as they could knowing they would be out of a job soon, and the people at the top protected by incorporation.
Is this inevitable with capitalism? Marx thought so.
What if the only companies that had drilled for oil were well established companies that didn't need to use debt? Their profits would have suffered as they built out their wells, and now that the price of oil is down, but all that would happen would have been a loss in share value and maybe the cutting of dividends.
But since fewer CEOs are emotionally connected to particular industries, the supposed best and brightest would have moved on to other industries leaving behind supposed incompetents. Likewise shareholders would have moved on tanking the stock price and dividends even more.
If anything it seems as if we are more likely to see big swings in commodity prices rather than fewer. Rather than the markets becoming more rational they are becoming more hypersensitive. If there is only one industry that has greater than 15% returns then all investors and computer traders will move there. Forget about the fact that humans need food, water, energy, shelter, etc. If a particular market is not making sufficient returns then investors feel the need to move on. Let the suckers invest in food if food is only returning a measly 10%.
Things could get very interesting.
not to worry...... they have assets that can be sold to more liquid companies with vast credit lines.
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