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There Will Be Blood - How The Fed Has Flooded The Shale Patch With Junk Debt
Authored by Wolf Richter of Wolf Street blog via Contra Corner,
It is possible that a miracle intervenes and that the price of oil bounces off and zooms skyward. But miracles have become rare. US light sweet crude last traded at $76.90 a barrel, down 26% from June, a price last seen in the summer of 2010.
But this price isn’t what drillers get paid at the wellhead. Grades of oil vary. In the Bakken, the shale-oil paradise in North Dakota, wellhead prices are significantly lower not only because the Bakken blend isn’t as valuable to refiners as the benchmark West Texas Intermediate, but also because take-away capacity by pipeline is limited. Crude-by-rail has become the dominant – but more costly – way to get the oil from the Northern Rockies to refineries on the Gulf Coast or the East Coast.
These additional transportation costs come out of the wellhead price. So for a particular well, a driller might get less than $60/bbl – and not the $76.90/bbl that WTI traded for at the New York Mercantile Exchange.
Fracking is expensive, capital intensive, and characterized by steep decline rates. Much of the production occurs over the first two years – and much of the cash flow. If prices are low during those two years, the well might never be profitable.
Meanwhile, North Sea Brent has dropped to $79.85 a barrel, last seen in September 2010.
So the US Energy Information Administration, in its monthly short-term energy outlook a week ago, chopped down its forecast of the average price in 2015: WTI from $94.58/bbl to $77.55/bbl and Brent from $101.67/bbl to $83.24/bbl.
Independent exploration and production companies have gotten mauled. For example, Goodrich Petroleum plunged 71% and Comstock Resources 58% from their 52-week highs in June while Rex Energy plunged 65% and Stone Energy 54% from their highs in April.
Integrated oil majors have fared better, so far. Exxon Mobil is down “only” 9% from its July high. On a broader scale, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is down 28% from June – even as the S&P 500 set a new record.
So how low can oil drop, and how long can this go on?
The theory is being propagated that the price won’t drop much below the breakeven point in higher-cost areas, such as the tar sands in Canada or the Bakken in the US. At that price, rather than lose money, drillers would stop fracking and tar-sands operators would shut down their tar pits. And soon, supplies would tighten up, inventories would be drawn down, and prices would jump.
But that’s not what happened in natural gas. US drillers didn’t stop fracking when the price of natural gas plunged below the cost of production and kept plunging for years until in April 2012 it reached not a four-year low but a decade-low of about $1.90 per million Btu at the Henry hub. At the time, shorts were vociferously proclaiming that gas storage would be full by fall, that the remaining gas would have to be flared, and that the price would then drop to zero.
But drillers were still drilling, and production continues to rise to this day, though the low price also caused an uptick in consumption that coincided with a harsh winter, leaving storage levels below the five-year minimum for this time of the year.
The gas glut has disappeared. The price at the Henry hub has since more than doubled, but it remains below breakeven for many wells. And when natural gas was selling for $4/MMBtu at the Henry hub, it was selling for $2/MMBtu at the Appalachian hubs, where the wondrous production from the Marcellus shale comes to market. No one can make money at that price.
And they’re still drilling in the Marcellus.
Natural gas drillers had a cover: a well that also produced a lot of oil and natural gas liquids was profitable because they fetched a much higher price. But this too has been obviated by events: on top of the rout in oil, the inevitable glut in natural gas liquids has caused their prices to swoon too (chart).
Yet, they’re still drilling, and production is still rising. And they will continue to drill as long as they can get the moolah to do so. They might pick and choose where they drill, and they might back off a smidgen, but as long as they get the money, they’ll drill.
Money has been flowing into the oil and gas business in form of a tsunami unleashed by yield-desperate investors who, driven to near insanity by the Fed’s scorched-earth policies, do what the Fed has been telling them to do: close their eyes and hold their noses and disregard risk and hand over their money, and borrow money for nearly free and hand over that money too.
Oil and gas companies have issued record amounts of junk bonds. They’ve raised record amounts of money via a record number of IPOs. They’ve raised money by spinning off assets into publically traded MLPs. They’ve borrowed from banks that then packaged these loans into securities that were then sold. The industry has been awash in cheap money and has drilled it into the ground.
This is one of the consequences of the Fed’s decision to flood the land with free liquidity. When the cost of capital is near zero, and when returns on low-risk investments are near zero as well, or even below zero, investors go into a sort of coma. But when they come out of it and realize that “sunk capital” has taken on a literal meaning, they’ll shut off the spigot. Only then will drilling and production decline. As with natural gas, it can take years, and the price might plunge through a four-year low and hit a decade low – which would be near $40/bbl, a price last seen in 2009. The bloodletting would be epic.
Worldwide, the balance of power in the oil business is shifting. Read… Oil Price Collapse Ricochets Around the World, Hits US Drillers, the Ruble … and Russia’s Probability of Default
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Sucks for everyone who gets their electricity from utilities that dog piled into "cheap nat gas fo'evar".
Coal will be back, in a big way, and I would not be surprised to see that the big boys scooped up the assets, shed liabilities in BKs or restructuring (like pensions or clean ups), and are ready to be shiny and profitable.
Just speculatin'...
Regards,
Cooter
Counterfeit [printed money] paper claims to REAL assets perpetrated by [insert PERPETRATORS definition here], on the backs of physical work by sheeple.
Quel surprise!
OT:
Timber!!!!!!!!!!!!!!
http://www.cnbc.com/id/102169783
Oh well, some enjoyed the run while it lasted, the muppets must be thoroughly fleeced by now for this article to be posted by luminairies like CNBS...
DaddyO
Remember when you had to have that revenue thang figured out BEFORE you had your IPO?
Good piece and quite true. Builders build and drillers drill, until the money gets cut off.
The gas industry looks like a master stroke of genius compared to building ghost cities, or the disaster of scumbamadon'tcare.
Generators relying upon NG for the fuel source get lower NG prices and you expect electricity prices to go up?
Change the name to Hooter.
Listen Zero's.
Just wait for the dead cat bounce on this one.
You USSA spoilsports will be paying $5.00usd at the pump and $1500 for a r/t coach airline ticket from Cleveland to Newark.
It's over Bitchez!
Dude, that is epic! You have 11 down votes and everyone above you (at the time of this posting) has no more than 1 each.
LOL!
Regards,
Cooter
Bangalore just does that "Listen" thing because he thinks it makes him stand out from the others basement dwellers, and conveys his uber-coolness. Even the name: Bang-galore! Goodness, what studliness! Wonder what time his Mommy gets home, and if he's finished his homework? Meanwhile there Junior sits pecking at the computer, telling the entire fight club to pay attention. I see a job as a burger flipper in his future. Try to remember this, Bangyboy, "Want fries with that?"
Buzz off dickweed - you and the "listen..." trike you rode in on.
For a while I thought he's just a sad parody of Million Dollar Bonus. But now I think he is just a shit head.
I drink your shale shake. I drink it up.
Listen.
Does your Shale Shake bring all the Zero's to your yard?
Couldn't resist.
Don't blame ya. Sometimes you just have to spike the damn ball when it's hanging in the air.
Buzz off dickweed - you and the "listen..." trike you rode in on.
Muslims control the oil markets and them desert lads all dressed in dresses will have none of that honky tonk hokey pokey foolin around. Theys got an imagination to protect..
Here. If you have a milkshake.[pauses]. And I have a milkshake. And if I have a straw... My straw reaches across the room, and starts to drink your milkshake. I drink your milkshake! I drink it up!
So basically the bankers got rich on this shale thing and get even richer if it succeeds, but stay rich either way even if all investors lose their shirts because the bankers and the guys who run the shale companies offloaded all the risk to others. Got it. Goodnight, and God Bless America.
Just like subprime. I wonder how much there is, in total.
We'll probably find out soon enough when the taxpayer gets hit with the bailout bill to cover all of the pension funds that invested in this farce. It's the least we can do to save domestic oil production and the American way.
The 'Drill Baby Drill ' party is on the rise again. How would that have turned out for ANWAR if this had gone ahead a few years back?
The really funny thing is that the Blue Team was also all in favor of drill baby drill as evidenced by all the drilling. They just said they weren't. But money talks and bullshit plays golf. The Blue Team will probably blame the Red Team for all the drilling that happened in the last few years. Just watch.
The drill baby drilling party is on private and/or state land...not federal.
But if you like your four dollar gas, you can keep it ;-)
We've had huge oil production from the States the last few years, but the only thing that brought the price of oil down (as if by magic, and very quickly) was a bunch of bullshit involving economic war against Putin. If you still believe that supply or demand are what set the price, you're not paying attention.
100% correct.
Oil is a boom/bust industry, I don't think any can deny that, but this lines up so perfectly it is quite suspect.
The markets are so controlled and manipulated, I sort of see it as modern day price controls. Instead of decreeing a price, as has been tried time and again throughout history, they use this broken corrupted algo market to achieve the same end result. Enough people still believe, so it works ... for now.
But one day they will manipulate the price of oil down, for this reason or that, and it will be a shortage. Low oil prices, yet no oil to buy. This could apply to any commodity really ... because you can't print that shit into existance and people won't produce it if they are BKed by the BS price.
And maybe that is when the shit hits the fan.
Regards,
Cooter
So.... what is the production cost of the oil developed from the "drill baby drill" era and fields????? Lets see.... I'll give you a hint.... $70-80/barrel or so.... and that equates to what at the gas pump???????
Nmewn.... not your best argument..... ;)
What exactly does junk debt funded mal-investment shale fracking have to do with ANWR?
Regards,
Cooter
Had ANWR gone ahead, the oil flood would be even greater. That is the basis for the oil price wars. Alberta's tar sands are gonna bust. Same leverage plays there. Big guys will start to mothball their projects. Canada's oil dependent economy is fucked unless they make exclusive deals with the Chinese and stop selling at huge discount to the US.
Canada should keep its oil and gas....; not that will happen.
So say Canada keeps it oil and gas..... tell me what happens to it's economy????? Let me know how that works out...lol (hint... 5 to 8 percent of GDP....)
Canada consumes 1.5M bbld/day... and it imports refined petro products... like gasoline...
What Canada needs to do is invest in some refineries and sell on the global market instead of being beholding to the US refiners and pipelines... (and taking a serious discount on selling oil south) but... there are risk assoicated with building refinireies... double down????..... (tar sands and refineries......) maybe not.... lol Plus you piss off the US or A......
And the voices of reason and caution got marginalized and silenced by the lame stream media..... Feeding Frenzy.....
Shale gas has been around for a long LONG time... so has fracking.... 1981.... it just didn't become worth the effort or profitable until the base oil price rose above around $80 per barrel.... You had better be prepared to put your big girl panties on and deal with a loss in your investment in shale oil if the price of oil stays below $80 for a sustained period.... like no one saw that one coming...... duhhhhhhh
Has John Wayne would say..... "If you are going to be stupid, you had better be tough...." investors these days are stupid.
just BTFD and shut up !
They should've put Bernanke in a glass jar, and placed him on the mantle piece.
Worse than blood! There will be RED INK.
But I would like more specifics. Particularly names of publicly traded companies with high debt loads that are likely to go belly up soon. Also, fraking companies that might possibly make it (if any).
chesapeake
Don't worry, GS will pick up the many bankruptcies for pennies on the dollar, wait for the next oil top and then selll it to you.
How far ahead was Buffet on the rail thing?
Buffet is parking as much money as he can in infrastructure because he knows what is coming. Rail, utilities, and anything like it he would probably pay a premium just to avoid the downside coming to many other classes of assets.
Regards,
Cooter
Beaks do you have the Shale crop report
Money first
Slide it along the frack fault line
Merry Christmas Beaks
The Dukes are trying to corner the market in Shale
Looks to me like NG is going to get a lot more expensive after the gap is filled tonight or tomorrow. Oil went down on a bullish storage report. NG is going to the moon by mid December. The news just said this cold weather pattern is locked in place and we are supposed to be in shoulder season now but we aren't with this weather.
Bring it, cold weather produces freeze offs in the gas wells right when you need them most. You shale haters are going learn a lesson about forced shut ins due to weather and many other factors which will lead to a massive short squeeze of the idiots piling on oil and NG right now.
By the way, did anyone notice these articles in the news today?
OPEC PRoduction falls sharply in October
http://www.firstenercastfinancial.com/news/story/60308-opec-says-collect...
Qatar cuts production from 800kbpd to 500kbpd since October
http://gulfbusiness.com/2014/11/qatar-cuts-oil-output-due-oversupply-mai...
Nat gas companies have or are in the process of building large pipelines into Mexico. Unless a large amount of new production comes on line the price of gas will go up when these lines become operational. Unless the economy collapses or some other drastic event.
Ahhh....good old days in the eighties when anyone could borrow millions for oil and gas drilling. The best immediately kicked back ten points to the banker. Then come back in a month with bad news, hole was dry. Banker says "too bad. See you next week with your new company". Banker quits or gets fired, maybe, and goes to new bank. Driller, who in many cases never did a bit of drilling, gets another loan. Too true.
Sure, invest in these guys!
So when does the FED start buying oil ... it's got to be a better investment than MBS or SLBS (Student Loan Backed Securities)
....futures......
imagine the bank holding the $40 July 2015 future contracts and no supply selling at that price
who wants to hold that bag?
Ya know: when I start seeing articles on ZH about oil going to $40/bbl, I believe the bottom is close enough for me to start going long.
The usual ZH effect of calling the bottom may be offset in this instance by geopolitics. They are driving the price of oil down to squeeze Putin and force his hand.
Putin is settling in RMB with the Chinese. Where is Russia's biggest market?
China.... me thinks some people in Euroland are going to be cold this winter.....
I think there is more to this price move than that.... the world has stopped purchasing crap... they are tapped out-broke-kaput... hence the demand for crap has dropped... and the demand for oil to make all this crap (read that China) has contracted......
In 2001 China was importing apprx 5 M bbld/day.... (77M bbld/day global production) in 2013 it was up to almost 10M bbld/day (90 M bbld/day global production)...... (source eia).
The low hanging fruit has been picked, for the oil production to increase more expensive to produce reserves had to be "tapped".... marginal cost increased passed on to end users.... classic demand destruction... lol
Here is a FT article calling drop in oil prices in Sept
http://www.ft.com/cms/s/0/97c70710-398d-11e4-83c4-00144feabdc0.html
IEA just issued a new update.... calling for demand growth to be substainatial lower and oil prices to continue to decline.... unless of course (how did they phrase it???) SUPPLY RISK.....lol
No such thing as too cheap. Question of just finding a market. Shippers ship.
The author fails to mention an additional factor encouraging no-profit drilling: The desire to get drilling done before environmental controls are put in place.
The desire to get drilling done before even more redundant, unnecessary, completely irrelevant, completely political and prohibitively costly environmental controls are put in place.
I’d say “there, fixed it for ya” but I’m sure there are far more appropriate adjectives that could be added to describe the complete neutering of the United States workforce, Spirit and global historical beneficence, our last decade or so notwithstanding.
Jmo.
So if you don't care for environmental reg.... maybe you should move to CHINA.... enjoy the sweet smelling air of Beijing... or the clean running waters of it's rivers.....
But then again... the us environmental reg have morphed into a form of "regulatory capture" by the corporations with deep enough pockets to sway the politicians and law makers...
And of course laws have no meaning if they are not enforced across the board... most states now relay on "self reporting" by the large companies.... they are in compliance because they say they are.... (that is if you are a "big" player) it is the small Mom and Pops that get screwed by these laws.... they cannot compete because they are held to a different standard.... hence regulatory capture by the big boys....
You have to have reasonable environmental regulations and laws.... and they have to be enforced even handed across the board..... with consequences sever enough that it is not profitable to violate... ie it is cheaper to pay the fine (if you get caught) than it is to comply...
China is a good example of what happens if you don't protect the commons.... air and water.
You have to have reasonable environmental regulations and laws.... and they have to be enforced even handed across the board...
I find no reason to dispute this line of reasoning. My perspective is that of the "little" guy. I couldn't believe the extra paperwork describing the recent factory recall on the wife's 10 year old Honda to replace some safety airbag devices, they had to report the mechanics also fulfilled the State of California's Statutory Mandated Global Warming Initiative by checking the air presssure in her tires. Pages of legalese to notify that her tires passed and to describe what we as kids used to do as routine for anyone pulling into the Texaco station for a "fill up".
Another example of the hubris that defines us.
" Fracking is expensive, capital intensive, and characterized by steep decline rates. Much of the production occurs over the first two years"
This is incorrect! All of that is wrong. See my earlier post today in which I said that the expected high capacity fracking wells have proved to decline much faster than expected. According a post answering mine, the technological fix is cheap and easy, a a little bit off effort gets all these wells to gush oil again. Both fracking and conventional wells.
So the auther needs to correct his post above. Decline is an illusion, gushing oil is a fact. At least if you believe the expert from earlier today.
Here is a conventional well drilled in the Permian Basin to 3000 feet in 1993 which had an IP of 28 bbl/day and 40 mcf/day. In it's 21 yr life time it has produced 39,683 bbl oil and 31,752 mcf gas. It cost $500k to $750k to drill according to numbers I could dig up about per foot drilling costs back then. How long did it take to pay back the initial investment given a$15/bbl avg price of oil during the first 10 years of it's life? Has it been profitable in all these years? Probably not until just recently.
Link to Reynaud Lease 33743 in Reeves County Texas
http://tinyurl.com/l8hqxwz
Here is a recent shale well drilled about .5 miles northeast of this one on an adjacent section and completed in Oct 2013 to a depth of 9500 feet with a 4000 foot lateral at a cost of around $7-9m. Through August of 2014 it has produced 66089 bbl oil and 991,707 mcf gas. At an average of $85/bbl oil and $5/mcf gas because this is liquids rich gas and that is about what the average well is getting for it's gas content the well has grossed about $10.5m so far. Now assume a 25% royalty cost and it's at the low end of break even cost. It's current run rate is around 4kbbl/mo and 70kmcf/mo producing a revenue of approximately $600-700k per month. That is a 10% per month return on a completely paid in investment.
http://tinyurl.com/q9n9p6o
This is the difference between the old wells you shale haters seem to love and the new frac jobs where the speculative money is going. Which one would you rather invest in????
OBTW, this Petrohawk well isn't even a spectacular well by current standards, it's just OK.
I found your post very confusing… while contradicting the article.
And, while only using two wells as some kind of comparison.
What am I missing here?
There is no article.... he gave you a link to production data of the wells he cited..... did you even open the links before writing your comment???
TROLL
The wells are nearly side by side. One drilled vertically to 3000 ft and tapping a bubble of oil at some unknown point as he luddite shale haters prefer. The other is a vertical bore to 9500 feet where it runs 4000 ft laterally and drains a very consistent shale structure full of hydrocarbons of various types. The pressure and flow are much higher than the old vertical well the luddite shale haters prefer. What better comparison could you ask for? The shale well isn't even a very good well by the standards of wells out there, it's not bad, about a single not nearly a home run so it's a fair comparison to the old well which was no great shakes either but about average for the play.
Right.......... and unicorns shit skittles........ rotflmao
the best researched piece i've seen on here in quite some time. sadly i disagree with the conclusions. a for effort, f for being wrong, wrong, wrong. just because the fed creates the reckless financing environment doesn't mean they can conjure oil enough to crash the market. in fact, there is no market, and no fundamental reason for the recent moves in price other than the same manipulators that ran it up in the first place selling their contracts to impact prices in the direction they desire.
what i didn't know until this very day is that it was barzini all along. [/don corleone]
on a BTU cost per unit NG is about half of gasoline. the problem is the electric car dreamers, and those who suppose shipping crude by rail is not really a problem, and that refining and CAFE standards are not really a problem but distributing NG is a problem. meanwhile the USG has quietly set up pumping stations for fleets of city and school buses, trash trucks, NG is ubiquitious in government vehicles, (check the list of pumping stations, versus the list of public pumping stations in your area) Obama decided kickbacks from E car makers was more useful than building out the NG system. whats good for government is not available for consumers. so the maladusted NG drilling fracking BS ends, the price goes up, even with CRUDE AT $50, its a slam dunk just get BARRIE THE HELL OUT OF THE FUCKING WAY
24 to 45 bbl well head is breakeven higher in outlying counties in the bakken. Big fish will eat smaller ones, this is already happened. No matter how much those who sit in thier mom's basement waiting the collapse of the oil industry, we will still be here. Drill and cap if price gets to low, current production will remain.
For years I have underestimated the strength this sector has played in the economy. Now that it is about to come under pressure we may see more pain wash over the economy. Lower energy prices can be a double edged sword.