Shakeout threatens shale patch as frackers go for broke
NEW YORK (Bloomberg) -- The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.
Shale debt has almost doubled over the previous four years while revenue has gained just 5.6%, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10% of their sales on interest compared with Exxon Mobil' s 0.1%.
“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”
Some investors are already bailing out. On May 23, Loews, the holding company run by New York’s Tisch family, said it is weighing the sale of HighMount Exploration & Production, its oil and natural gas subsidiary, at a loss.
HighMount lost $20 million in the first three months of the year, after being unprofitable in 2013 and 2012, Loews said it its financial reports. As with much of the industry, HighMount has shifted its focus to oil after natural gas prices plunged and has struggled to find sites worth developing, company records show.
Mary Skafidas, a spokeswoman for Loews, declined comment.
In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter, according to company records compiled by Bloomberg on 61 exploration and production companies that target oil and natural gas trapped in deep underground layers of rock. And companies including Forest Oil, Goodrich Petroleum and Quicksilver Resources racked up interest expense of more than 20%.
Quicksilver acknowledges the company is over leveraged, said David Erdman, a spokesman for Quicksilver. The company’s interest expense equaled almost 45% of revenue in the first quarter. “We have taken concrete measures to reduce debt,” he said.
Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.
“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”
Chauhan wrote a report last year titled “The Other Tale of Shale” that showed interest expenses are gobbling up a growing share of revenue at 35 companies he studied. Interest expense for the 61 companies examined by Bloomerg totalled almost $2 billion in the first quarter, 4.1% of revenue, up from 2.3% four years ago.
The drilling spree boosted U.S. oil production to 8.4 MMbpd, 16% more than a year ago and the highest since 1986. Growth has been driven by advances in horizontal drilling and hydraulic fracturing, or fracing, which unlocked crude and natural gas trapped in formations like North Dakota’s Bakken shale or the Marcellus in the U.S. northeast.
The gains haven’t come cheaply. Goodrich said earlier this month that it’s trying to whittle its well costs in the Tuscaloosa Marine shale down to $11.5 million apiece. The $1.1 billion company, based in Houston, spent almost $52 million more than it earned in the first quarter.
The company has enough money to cover its 2014 capital needs and is working with its board to fund 2015 as it ramps up drilling, spokesman Daniel Jenkins said in an email.
A successful well announced last month has propelled Goodrich shares to $25.34, more than double the 2014 low of $12.28.
While borrowing to spend is typical of start up companies, it’s not always sustainable. Forest Oil, where interest expense totaled 27% of revenue in the first quarter, in February reported disappointing well results, and warned that it might run afoul of its debt agreements. Forest on May 6 reported a plan to sell itself to Sabine Oil & Gas in an all stock transaction. Denver-based Forest declined to put a value on the deal. The company declined comment. Shares have declined 39% so far this year.
Zaza Energy, which got its start as a JV with Hess, bought up oil rights in the Eagle Ford shale field and the nearby Eaglebine in South Texas, near the heart of the U.S. oil boom. Its first quarter revenue fell short of interest expense. The firm’s accountants in March voiced “substantial doubt” about the Houston-based company’s ability to stay afloat.
Hess, which dissolved the partnership almost two years ago, lost money on the deal. And its foray into what has turned out to be the biggest shale play in the U.S. prompted Elliott Management, billionaire Paul Singer’s investment firm, to oust John Hess last year from the chairmanship of a company his father founded more than 80 years ago. Zaza has since entered into a JV with EOG in Houston, one of the few shale companies to bring in more cash than it spends. Zaza’s shares have declined 28% this year.
“We are now significantly increasing our production volumes and revenue,” said Todd A. Brooks, President and CEO.
Swift Energy has slowed drilling while trying to sell acreage or find a partner to shoulder some of the costs. The company on May 6 reported a $175 million JV with a unit of a government controlled energy company in Indonesia. The proceeds will be used to help pay down debt. The deal statement still didn’t stop Standard & Poor’s from cutting Swift’s credit rating on May 15 and tagging the company with a negative outlook. Shares have declined 19% so far this year.
“Traditionally we’ve been a financially conservative company,” said Bruce Vincent, President of Houston-based Swift. “We’ve become more leveraged than we historically have been and we’ve become uncomfortable with that.”