Oil crash puts US shale on red alert

US shale producers have $140B of debt coming due over the next two years

Some U.S. shale companies are fighting to survive after an oil price war between Saudi Arabia and Russia sent crude plunging.

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West Texas Intermediate crude oil, the U.S. benchmark, fell by as much as 33.8 percent, the most since the outbreak of the 1991 Persian Gulf War, to a low of $27.34 a barrel in overnight trading. Oil must be in the upper $40s on an aggregate basis to make U.S. shale companies profitable.

“We were already looking at levels that were holding around your break-even line,” Stephen Schork, founder and editor of the daily oil subscription newsletter The Schork Report, told FOX Business. “When you couple that with the fact that $140 billion dollars of debt is coming due over the next two years and Wall Street is not going to, in most cases, roll that debt forward, i.e. they want their money back. There was already going to be a tremendous amount of bloodletting in the oil patch.”

PUTIN TAKES AIM AT US SHALE OIL INDUSTRY

The last time crude oil prices fell into the mid-$20 per barrel range, in February 2016, crude rebounded to $48 per barrel within three months. However, the demand picture is weaker this time around as the outbreak of the new coronavirus has resulted in fewer flights and social distancing.

View of the pumpjack in the oil well of the oil field. The arrangement is commonly used for onshore wells producing little oil. Pumpjacks are common in oil-rich areas.

“These low prices are unsustainable in the Permian Basin and elsewhere,” Andrew Lipow, president of the Houston-based consulting firm Lipow Oil Associates, told FOX Business. “As a result, I expect bankruptcies to increase and to see more consolidation.”

Exploration and production companies are worst off because their fortunes “wax and wane with crude oil prices,” according to Stewart Glickman, energy equity and industry analyst at CFRA Research. He said a number of E&Ps use a hedging strategy that involves selling out-of-the-money puts on crude oil benchmarks, which “works great so long as the prices don’t collapse.”

Glickman thinks oil prices plunging below their break-even numbers may cause some E&Ps to “shut down or idle existing wells.” He specifically singled out Continental Resources and Occidental Petroleum as two companies that will “get clobbered with terrible timing.”

Continental doesn’t currently have any hedges in place, and in addition to being mostly oil-driven, it has high debt levels.

Meanwhile, Occidental Petroleum recently completed its $37 billion acquisition of Anadarko Petroleum, whose cost rose to $57 billion when including debt. Along with its debt burden, Occidental was already scheduled to pay “unsustainable common dividends” and an 8 percent preferred dividend obligation to Warren Buffett, Glickman said. The sharp drop in oil prices makes it more difficult for Occidental to sell assets to raise money to justify the deal.

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“To the degree that prospective buyers are still interested in their non-core assets, potential price points are about to get squeezed,” Glickman concluded.