Shale Boom Goes Bust As Costs Soar

Tyler Durden's picture

"Traditionally we’ve been a financially conservative company," explains one fracking company, warning that "we’ve become more leveraged than we historically have been and we’ve become uncomfortable with that." This is the growing message from a shale boom that, as Bloomberg reports, is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground. As everyone chases the dream, well counts have soared and production per well has tumbled. "The list of companies that are financially stressed is considerable," warns one analyst as shale debt has almost doubled over the last four years while revenue has gained just 5.6% "not everyone is going to survive. We’ve seen it before."



As Bloomberg reports,

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 last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.


“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.”




In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter... companies including Forest Oil Corp. , Goodrich Petroleum Corp. and Quicksilver Resources Inc. racked up interest expense of more than 20 percent.

And here comes the vicious circle...

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.”


While borrowing to spend is typical of start-up companies, it’s not always sustainable. Forest Oil, where interest expense totaled 27 percent of revenue in the first quarter, in February reported disappointing well results, and warned that it might run afoul of its debt agreements.


“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.”

So is there a limit to what excessively low credit risk premia will stand? Is there a limit to what the market will bear? It seems so... but the day of creative destruction in America appears to be over as nothing has consequences. The best case sceanrio is some major shakeout in the "black gold" rush, leaving stronger sustainable companies non-reliant on ultra-low interest rates to maintain their business model (or else energy prices must soar to maintain these companies)... be careful what you wish for from the Fed.

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sunny's picture

NOT POSSIBLE!  Mauldin in a recent KWN interview assured us all that we have all the petrochemical energy we need to be totally energy independent and an exporter as well.  Surely, he wouldn't be fibbing to us would he?

Fuh Querada's picture

Joan Maudlin obtained that information in one of his high- powered conferences with U.S. Senators where they also informed him of efforts to reduce the debt ceiling. Still waiting for EURUSD parity that he predicted was imminent in 2009. The guy is a buffoon.

Stackers's picture

If you've read Mauldins book "End Game" then you would know he is no fool. He's just is an optimist when it comes to listening to the buffoons in power. Like Schiff he constantly gets the "broke clock" lable.

ZerOhead's picture

True words spoken by an anti-semantite...

max2205's picture

Company officers are milking every dime to their salary bknjs and options. 


They know its time to get it before it blows up

CrashisOptimistic's picture


Well, you look up his academic background, and then after you exclaim THAT DOESN'T MATTER . . . quietly decide if you care what he thinks.


Never mind here it is

BA Rice University Master's Degree Southwestern Baptist Theological Seminary Before wiki removed his entry my recall was the BA had nothing to do with finance, and if it did, it's a BA and not a BS so non quantitative.
SRSrocco's picture


Shale heading for trouble?  Who would have THUNK.  I guess it might have something to do with the fact that BREAK-EVEN for the typical shale gas player is about $7MMbtu.... according to energy analyst, Art Berman.

We got a year or two before the PHAT SHALE LADY SINGS.  After that, there's no HOPIUM left to keep BAU- Business As Usual going.

I hope Americans placed their bets wisely.


TheFourthStooge-ing's picture


Shale heading for trouble?  Who would have THUNK.

I know, right?! I mean, this dilemma was never written about on the internet over the last greater than four years by Jim Kunstler or Chris Martenson or on The Oil Drum or on any other site at all! It was unpossible to predict.

I hope Americans placed their bets wisely.

If your definition of wisdom includes spending every last dime (including the money for food, rent, gas, utilities, and debt service) on lottery tickets and a pack of smokes, then yes, most Americans have placed their bets wisely.

samsara's picture

I first read about Peak Oil 2002ish at then on to . When oil was less than $30 a barrel. THEN on to when it first went up. Read thousands of pages of brilliant stuff by very knowledgable writers over that time.

So, Yes many of us saw this coming. Laughed at, ridiculed, called Doomers, all of it.

So, It's funny just watching for the last ten years as it SLOWLY rolled over King Hubbard's peak.

Heard every possible "But They.... " excuse along the way.

Not a single god damn policy change.

We will keep doing what we are doing until we can't. Then we won't.

It's too late now. BUT, it did enable me to sell my house at the peak in 2004, AND Au/Ag. Were $400/$7. at the time so, heh, that worked out.
(Oh, and ammo and delivery devices were cheaper and easy to get then too....)

So to the Cornucopians from those years.... Suck it.

daveO's picture

Oil's up 3x's since then. Not counting Chinese demand growth, US debt has soared since then. Shale gas would've never made sense had the FED not orchestrated total theft(zero interest). Call them Federal Reserve malinvestment employees, not oil field workers. 

sushi's picture

Don't worry.

We can always export to Ukraine and earn big bucks.


Rock On Roger's picture

Aye, and you've been writing that for quite awhile.

There is lots of other gas though, it's just not sexy.

And it is not in United States of America.



Jumbotron's picture

Energy Returned On Energy Invested (E. R. O. R. I.)

'Nuff sed.

NidStyles's picture

I don't buy it when I know that he wage rates are heavily inflated up there, and a lot of money is likely just thrown away thanks to the bureaucrats.


There is more going on than a simplistic equation that ignores human action.

Jumbotron's picture

Wages have absolutely NOTHING to do with the facts.  Shale energy has peaked.  The number of wells has gone up every year.  They have never been higher.  More are going up evey day.  Yet, we have no more shale energy than before.

Try again.

SAT 800's picture

Sounds reasonable to me.

NidStyles's picture

Wages are a huge part of costs, and ignoring them along with ignoring the bureaucrat slice of the pie is simply ignoring reality. 

It's telling that you tools keep ignoring that every measure of this is done as a measure of cost in US DOLLARS. It tells me that there is an establishment hack out there getting paid to strategize a way to control the production of energy, and likely is metering the output. The Soviets did the same thing.


You college kids keep pushing the same BS meassage that the administration and the Academics are pushing. Why is that after everything that has happened you haven't pulled your head out of your ass long enough to see what is going on around you?

Jumbotron's picture

<slap on the forehead> GRAPH !!!!!!!!

NO...MORE...SHALE...ENERGY....EVEN....WITH.....MOAR....WELLS !!!! can you be so FUCKING BLIND AND STUPID !!! ????

Jumbotron's picture



CrashisOptimistic's picture

Shale oil is not kerogen.  Shale oil is API 39ish and though may be light on certain fractions, it's right and proper oil.

Oil shale is kerogen.

Worst labels for clarity possible: oil shale vs shale oil.

Mad Muppet's picture

But, but ..............does shale oil come from oil shale? I'm soo confused.

James_Cole's picture

You're looking at it way too narrowly Jumbo, there's an easy fix. Just switch the lines on the graph and boom problem solved! I'm confident gs can get one of their lackeys to achieve this. 

sushi's picture

Excellent point.

The other fact everyone overlooks is that they have some great strppers up in Williston.

You don't get that kind of action unless someone is dead serious about something.


NidStyles's picture

You trust the same assholes that charge you how much for a barrel of Oil? That is my point. 


The moron is the person that doesn't ask questions when presented with data from a SINGLE source. 


We as in you and me have no clue whether this data is accurate or even honest. We simply have only this specific data that tells us what is going on. 

Jstanley011's picture

That's not what that graph shows at all. It shows that barrels per well have leveled off (not "tumbled") while the number of wells continues to rise.

Great headline, btw:


Caused by what?



NidStyles's picture

Some people just do not get logic, and honestly I know dick about the oil industry, but I can see BS when I see it.


Amish Hacker's picture

The real winners will turn out to be---surprise, surprise--- the banks. The drillers' nightmare---a debt load that has doubled in 4 years---is a dream come true for the banks, since those loans are their rapidly-growing assets.

daveO's picture

You're fighting a losing battle, here, I'm afraid. No one wants to think about the astronomical wages involved(brought to us by the FED-led malinvestment). They also don't like talking about how Brazil gets by on cane (ROEI of about 8, I think). The End is Near! The Sky's Falling! If it bleeds, it leads. 

sessinpo's picture

sunny    NOT POSSIBLE!  Mauldin in a recent KWN interview assured us all that we have all the petrochemical energy we need to be totally energy independent and an exporter as well.  Surely, he wouldn't be fibbing to us would he?


There is a big difference in having the energy in the ground and being a prudently run company that extracts it. For example, the same could be said for solar. But countless solar panel companies have  gone under and there is no shortage of the sun. But some wcompanies will survive. This happens in many industries.

cossack55's picture

I certainly hope you are not relying on Al Gore for proof of sun shortage.

Remington IV's picture

In Al ...we .... trust ???

SAT 800's picture

5.6% growth; twice as much debt; sounds okay. What could go wrong?

Canadian Dirtlump's picture

Provided it is wet gas with distillate it should be profitable but as i posted earlier this week i am seeing on the ground reports of wells in normally good areas having trouble completing horizontal legs and fracs failing due to tight strata.

We are at a crossroads in nat gas price. I know of more than a few conventional gas players  ( low pressure coalbed methane ) who would be very active if gas prices went up a buck recall they just drill vertical.

At this natgas price coal makes as much or more sense than gas  for power generation and we have no infrastructure to export so the situation gets complicated. The fact that we read earlier this week that there are millenial knobs joining the fray virtually guarantees a calamity short term at least.

When i started in the pipeline industry 12 years ago we did no oil and all gas. Now we do no gas and all oil. The reality is that within a price range of say between 4.50 and 6 bucks for gas we have an increasing number of players who cannot make it but lots who can. That being the case i cant see prices going that high since there is no lucid export route and an at best infant nat gas surface use. I know of several well funded conventional gas juniors with shut in production due to price.

So between a burgeoning supply and a north american power grid that CAN use it based on price i cant see anything but a range of price until something happens.

Also, saskatchewan has mandated that very soon nat gas gets gathered instead of flared and therefore as the bids for the gas plants come in my front door I can tell you supply will not be a constraint.

More nat gas is flared than is captured so ignoring these declines the supply of domestic gas ( albeit unclear ) is much higher than it is now.

We can talk about a collapse in drilling and production but the facts are if we captured all the nat gas we drilled our reserves would make a hoarder blush.

The fact that we havent pushed nat gas as a surface fuel and or made means for export is idiotic but absolutely unsurprising.


Marco's picture

CNG only really works for trucks because of the energy/volume ... to make natural gas useful as fuel for cars a major breakthrough in gas to liquids is necessary.

Even then, proven reserves in BOE are only 2x times that of oil. If we did everything with gas we would just start to very quickly run out of that instead of oil (at current levels of economic activity, which might collapse sooner than the reserves).

Canadian Dirtlump's picture

No. It works for trains too and as you say lng vs cng is a major coup. There is finally diesel nat gas hybrids and getting trains and heavy trucks on nat gas would be a game changer. Again if we had an export market for our gas the economics would change because the price would change.


As for reserves I can't have faith in govt estimates as we flare as much gas as we capture ignoring future conventional and unconventional sources. I said before that in canada we have alberta which gives oil companies a 2 week flare permit after which they have to gather vs. saskatchewan which has no gas gathering infrastructure but rather small well tie ins to 400bbl tanks for oil while the gas goes to heaven.


As this changes, and if gas prices go up things change. Like I said before if the gas we flare wastefully already could do some good before it gets burned we win. If we get an infrastructure where gas an oil are used as a surface fuel, we win.


Hell I'm no pinko but I would support fleet, heavy and rail traffic be regulated to use gas / diesel hybrids. Again at this point we flare as much as we sell as far as I know.

Marco's picture

Sorry, that was my Eurocentricity talking (ie. electric trains).

buzzsaw99's picture

27% of revenue soon to be 107% of revenue

ZerOhead's picture

So you are basically saying that as long as they reduce the interest costs on their debt by 75% or so... and drill 4X as many wells as they have now... they should pretty much be able to break even until the oil runs out in a couple of years provided someone else pays for the eventual clean-up.

Sounds good to me...

cossack55's picture

SuperFund, baby.  They can just throw it in with the WIPP and Hanaford site cleanups (well, in about 1000 years for WIPP).

samsara's picture

Well color me fuckin surprised.

All right from the gallery, "There's lots of gas if THEY only let us...."

The Bakkens will save us...

Canadian Dirtlump's picture

Is your guys' bakken mostly gas? Serious question because the bakken my company works in, in saskatchewan, is all oil and every cube of gas is flared into the air at best. This is changing soon which will only increase supply with no drilling.

readyforit's picture

You were advised thusly.


Jumbotron's picture

To the downvoters....

And this reprint from 2005.....yes.....2005....the same year that his book "The Long Emergency" came out.

And here is his chart showing the Long Emergency.....


You WERE advised thusly.

cowdiddly's picture

My next door neighbor is a horizontal driller. He told me about 3/4ths of the wells his company has drilled this year are aimed right down the edge of property lines. Now when you frack a well drilled down a property line it cracks the underlying rock a great distance from the underlying well bore. So what is effectively being done is they are stealing the gas of anothers property that they do not have an oil lease on and the real owner is never compensated. The other 1/4, he said are fringe showboat wells drilled to try to unload the lease/field on another bigger sucker.

Againstthelie's picture

And with their chemicals they destroy water reservoirs, which increases revenue for Nestle and water sellers and those who can't afford to buy water or don't know what what they are drinking, are becoming sick and also are turning into great reveneue creators for Big Pharma and the "health"care industry.

A real great NWO business!