Small Shale Producers in ‘Absolutely Dire’ Situation: Oil Analyst Schork
American oil industry is experiencing a possible doomsday scenario.
The coronavirus pandemic has caused oil demand to plummet so quickly that the world no longer has enough room to store barrels. At the same time, Russia and Saudi Arabia flooded the world with a surplus of supply.
This "double" the black swan drove oil prices to levels that make it impossible for shale oil companies in the United States to make money. US crude for May delivery turned negative on Monday – which has never happened since NYMEX oil futures began trading in 1983. It was perhaps the worst day on the oil market on record..
US crude for June delivery is still trading above $ 20 a barrel, but even that’s disastrous.
«$ 30 is not bad, but once you get $ 20 or even $ 10 it becomes a nightmare.», – said Artem Abramov (Artem Abramov), Head of Shale Research at Rystad Energy.
During those troubled times, many oil companies ran into too much debt. Some of them will not be able to survive this historic collapse..
With an oil production of $ 20, 533 oil exploration and production companies will file for bankruptcy by the end of 2021, according to Rystad Energy. Rystad estimates there will be over 1,100 bankruptcies at $ 10.
«At $ 10, nearly every US company with debt obligations will be forced to file a Chapter 11 bankruptcy filing or consider other strategic options.», – said Abramov.
The most startling moment in the formation of record low oil prices is that it happened after Russia and Saudi Arabia agreed to end their epic price war after the intervention of the President. Donald trump. OPEC + agreed to cut oil production by record amount.
Trump said the OPEC + deal would save countless jobs and much-needed stability for the oil industry.
«It Will Save Hundreds of Thousands of Energy Jobs in the United States», – posted by Trump on April 12. «I would like to thank and congratulate Russian President Putin and King Salman of Saudi Arabia».
However, crude oil continued to fall, in part because these production cuts did not begin until May. And demand continues to wane as planes, cars and factories are taken out of the game due to the coronavirus pandemic.
The oil industry’s hope is that Monday’s negative prices were an unfortunate accident caused by the rollover of futures contracts.
The record low prices for May contracts stem from very low trading volumes ahead of their expiration on Tuesday. This is because there are concerns that there will be no storage space for the barrels, which will be delivered in May. The June contract, however, fell only 10% to $ 22 a barrel. And Brent crude oil, the world benchmark, fell by only 5% to $ 26.50 per barrel.
However, oil contracts are rolled over every month and they do not fall to record lows..
«There will be many companies that will not survive this downturn», – said Ryan Fitzmaurice (Ryan Fitzmaurice), Energy Sector Strategist at Rabobank. «This is one of the worst ever».
Energy Sector S&The P 500 has lost more than 40% of its value this year, despite an overall sharp recovery in the stock market over the past month..
Noble Energy (NBL), Halliburton (HAL), Marathon Oil (MRO) and Occidental (OXY) have lost more than two-thirds of their value. Even Dow’s ExxonMobil (XOM) is down 38%.
Whiting Petroleum was the first victim of these events. Former oil shale leader filed for Chapter 11 bankruptcy on April 2.
In the Rystad scenario, with an oil price of $ 20, more than $ 70 billion of oil companies’ debt will be reorganized as a result of bankruptcy, followed by another $ 177 billion in 2021. And this only applies to E&P companies, not the service industry, which provides tools and manpower to drillers..
The key is how long oil prices will stay so low. Rapid rebound in prices could allow many oil companies to avoid bankruptcy.
Buddy clark (Buddy Clark), co-chair of the energy practice at Houston law firm Haynes and Boone, said his firm "extremely busy", working on potential bankruptcies of oil companies. Haynes and Boone were forced to withdraw lawyers from other divisions of the company to solve the oil problem.
«I don’t think I’ve seen anything like this in my life. This is unprecedented», – said Clark, who started in the industry in 1982.
Clarke believes that, despite further collapse in prices, in 2020 there will be only about 100 bankruptcies in the oil industry..
«It’s hard to believe that 100 bankruptcies is an optimistic view. It just shows you where we are.», – said Clark.
It is possible that more bankruptcies would already have occurred if not for the extreme volatility in oil prices. Clarke said companies are having trouble making restructuring plans because they don’t know what the price of the product will be..
«Ironically, the lower price slowed down the process», – said Clark. «A number of companies may have already applied, but they need to go back to the drawing board».
The dire outlook for the oil industry will make it very difficult for companies attempting to reorganize in accordance with Chapter 11 to obtain the necessary funding and support. Lenders who routinely exchange their debts for stocks may not want to..
This means that unlike the 2014 crash–2016, some oil companies may not survive at all.
A nightmarish scenario could provide lucrative acquisition opportunities for the largest players in the industry. Troubled oil companies, either in the event of bankruptcy or before, will be forced to sell their main areas at bargain prices. Exxon and Chevron, industry leaders, may be tempted make such acquisitions.
The oil disaster has raised many questions about which companies will face bankruptcy. The most vulnerable are those companies that accumulate too much debt, face pending debt payments and cannot generate cash flows even for interest payments..
Abramov from Rystad said that «no one will be surprised», if Chesapeake Energy (CHK) and Oasis Petroleum (OAS) are forced to file for bankruptcy.
Chesapeake Energy recently suspended its preferred dividend. The company’s share price fell so low that a 1 / 200th share split had to be performed to meet the swap requirements.
Shale driller Oasis has lost more than 90% of its value this year. Its shares are trading below 30 cents.
Although American oil producers have recovered from the 2014-2016 oil crisis, there are fears that the shale industry could be permanently affected..
Investors are already tired of the industry’s terrible returns after years of over-spending and oversupply. And this was all before the great oil disaster of 2020..