About 30% of US shale operators are technically insolvent at $35-a-barrel oil prices, in accordance with a study released Monday by Deloitte. That means the discounted future value of these frackers is lower than their total debt.
“Beneath this phenomenal growth, the reality is that the shale boom peaked without making money for the industry,” the report said.
Outside of the companies which can be technically insolvent, 20% of US shale oil operators are financially “stressed” at $35 oil, Deloitte found.
Frackers have burned through $300 billion
Aided by historically-low interest rates, US shale oil companies long enjoyed comfortable access to capital from investors captivated by their growth potential. These investments enabled technological innovations that sent production skyrocketing and made frackers more efficient.
Yet earnings and free cashflow proved elusive. The US shale industry burned through $300 billion since 2010, according to Deloitte.
The current recession and subdued energy prices are now forcing large and small oil companies to slash the worth of their once-lucrative portfolios.
Those writedowns from Big Oil could you need to be the beginning. Deloitte says that the shale industry will be forced to take note of the value of their assets by around $300 billion, according to Deloitte.
And while these asset impairments do not directly impact a company’s cash levels, they do worsen already-precarious leverage metrics. That’s because writedowns do not wipe out your debt accumulated to build up drilling projects.
Fracking trailblazer could go bankrupt next
With the coming wave of writedowns, the usa shale industry’s leverage ratio could spike to 54% from 40%, according Deloitte, potentially triggering “many negative sequences of events, including bankruptcy.”
Already this year, 18 oil-and-gas companies have defaulted on the debt, in comparison to 20 for many of a year ago, according to S&P Global Ratings.
The financial stress could set off a string of last-minute mergers by oil companies unable to pay or refinance their debt.
Deloitte warns that just 27% of major exploration & production companies are undoubtedly “attractive” acquisition targets. “Being ‘adventurous’ in today’s uncertain environment could be fatal,” the report said, adding that half of the drilling companies are risky bets.
“The key question is what to buy and, more importantly, what not to buy,” Deloitte wrote.
Fossil fuels starving for cash
It won’t get any easier for the usa shale industry to attract capital.
At the same time, there remains great uncertainty about how precisely quickly the entire world economy will bounce straight back from the deep recession.
Given the rise of remote working and drop in airline travel, it could take time and effort for oil demand to come back to pre-crisis levels — if it ever does.