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Desperate Shale Companies Issue Stock To Stay Afloat
The collapse in crude has provided voluminous evidence that investors in fact never, ever learn and the temptation to buy something “cheaply” usually trumps the fact that in many cases, the buyers haven’t the slightest clue as to the multifarious underlying factors that actually dictate prices. This was on full display over the past several months as retail investors rushed into shares of US-listed oil ETFs ahead of the widest contango in four years (Goldman would later confirm that any short-term "stabilization" is likely tied to retail ETF inflows). A further demonstration of this was EXXI’s recent offering of $1.45 billion in 11% 2020 notes — the deal was upsized. Neither of these “investments” has turned out particularly well and as we noted earlier this week, the EXXI notes promptly fell 10%, while at the aggregate level, Bloomberg notes that shale-related junk bonds have cost bargain shoppers some $7 billion in just two weeks since the start of March.
Meanwhile, producers are doing whatever they have to do to survive in the face of depressed prices and in addition to floating junk bonds, this means selling shares. Here’s more from Bloomberg:
U.S. oil producers are issuing new shares of stock at the fastest pace in more than a decade, looking to investors for a cash lifeline to pay down debt and keep drilling as crude prices continue to sink.
Tapping equity markets has become the best option for companies such as Dallas-based RSP Permian Inc., which announced March 17 it’s seeking to raise as much as $232 million by selling additional shares. Calgary-based Encana Corp. and Noble Energy Inc. of Houston also have issued shares in the past two months to reduce debt.
That brings funds raised in the first three months of the year to about $8 billion, more than 10 times the total in the same period last year. As the continued slide in oil prices further crimps cash flows, banks are pressuring these companies to shore up their capital and reduce debt to lower servicing costs and provide wiggle room...
As recently as December and January, many producers assumed there would be little interest in pouring more money into the sector, and that funding from debt or equity wouldn’t materialize, said Rob Santangelo, co-head of equity capital markets Americas for Credit Suisse Group AG.
That began to change in February when prices seemed to stabilize and frozen credit and equity markets opened up. The $8 billion in stock issued in the first three months of 2015 is the highest of any quarter in more than a decade. If the pace continues, sales of new equity would surpass the total of 2008 and 2009 combined, the last time oil prices crashed, according to data compiled by Bloomberg.
The surge in equity offerings, even with the dilution of existing shareholders, now is widely considered the lesser of evils versus expensive borrowing or asset sales at reduced prices, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells.
That makes sense: why raise capital by issuing something you have to repay when you can just dilute existing shareholders with what may turn out to be worthless equity especially when investors dying to catch a falling knife will be happy to hand over their money?
“Equity does not have to be paid back and requires no disbursements of revenue and net profits,” Eckard said. “It buys into your plan and works for companies that can make it through the downturn in commodity prices.”
Investors are coming to the table in the belief they are buying in at the bottom of the market and will reap gains in the long-term as oil prices recover, said Christian O’Neill, an energy analyst at T. Rowe Price International Inc., which owns shares in numerous producers.
The problem here (well, besides the whole giant dilution and gullible retail investors thing), is that just as high yield debt issuance works to keep prices depressed by ensuring that producers have to keep producing at a breakneck pace to keep what little cash is still coming in flowing so coupon payments can be made, so too does issuing more and more equity put pressure on prices by keeping insolvent companies solvent:
Meanwhile, the same companies that are offering investors double-digit yields may ironically be shooting themselves in the foot (and, as we suggested last month, contributing to disinflation) because as the Bank For International Settlements notes, keeping current on debt payments often means maintaining elevated production because keeping a leverage-driven bubble inflated means doubling and tripling down and this is exacerbated by investors’ willingness to take on risk if it means squeezing out a few basis points of yield versus “safer” debt which, depending on where you look, may actually produce loses thanks to NIRP.
The inevitable result here will be yet more supply, exacerbating the shortage of storage and validating what we said a few weeks back which is that in fairly short order, US on-land storage capacity will be exhausted meaning each incremental barrel will have to be dumped directly onto the market, a scenario which is clearly not conducive to supporting prices.
In the end, this is yet another example of what we discussed here almost a month ago. Namely, that easy money policies have contributed to overbuilding and oversupply and have actually served to perpetuate disinflation in some cases, the commodities markets being one of them.
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It wont end well (for both sides).
"But they told me the price of tulips would always be high" and the band played on.....
Yeah let me buy some of that shale oil stock. Seems like a great investment to secure my future.
P.T. Barnum said something about this. I can't remember what it was cause I'm so excited about buying some of these shale oil stocks. I know it has to be a good buy cause my Brother in Laws, best friends wifes hairdresser whose cousins neighbor knows somebody who knows a guy who used to work in the industry said to hop onboard this train before it leaves the station. I do so want to take a trip. What? Wait a minute an "Ow My Balls" marathon follwed by "Ass" is coming on...gotta go.
not true the crooked bankers and lawyers issuing this crap to pension funds will make a killing. They could give a shit that they know it will fail.
they are raising money in part to contine to drill when the rig count has collapsed everywhere but the middle east? How does that work?
They are raising money to pay the ever important "retention bonuses" to the illustrious executive team.
The US could issue some bond guarantees for the Shale Companies like the ones just issued for Ukaine
https://www.youtube.com/watch?v=Hf4BgvN5f_E
A great idea. Just courier the stock certificates over to the Fed, to the attention of yellen.
This fucking bitch is buying up everything.
Why would you purchase stock in any of these shale companies that are issuing more shares?
If the officers of these companies knew what thet were doing, they would get a government bailout and would not need to issue more stock. JEEZ.
Many of them are not large companies. No bailouts will be forthcoming to save them, especially with Obama the oil hater in the WH.
Now, if their debt starts going belly-up and it starts threatening banks that hold that debt.... yes, you will most certainly see a BANK bail-out, but never a bail-out of the drillers.
Step 1: Merge.
Step 2: Apply for bailout, now that they're TBTF.
Hey, it worked for numerous banks across the globe.
Hey, those chumps investing the endless blizard of social app startups might want to put their money somewhere 'safe'.
I know the people involved. Bank takes you out to dinner and strip clubs...you buy the stocks he offers. Another friend just took clients to Aspen for a week of sking....you buy the stock. You hook the client up with a weekend. Pension Funds aren't really bonus driven, low end guy doesn't worry about performance...and couple of perks are worth couple of large buys. No worries as the F-N taxpayer will bail everyone out like last time!
The only people going to lose more money than those who buy these new shares are the people who bought the old shares. Immediate dilution and eventually bankrupt, as opposed to just eventual bankruptcy.
Yep, the hunting season on optimistic fools is still open....
Why someone want to buy dead company ?
DEATH TOLL IN TWIN SUICIDE BOMBINGS OF YEMENI MOSQUES REPORTEDLY RISES TO MORE THAN 120
shale companies are doing ZZZZ Best they can do
no more covenant lite bond issues? ... what has the world come to??
Shale oil water pollution stock?
Might as well loan a junkie a c-note as he walks into a 7-11 to buy lottery tickets and smokes prior to visiting his dealer.
Great idea, since a sucker is born every minute.
take on debt to buy shares, take bonus
sell shares to pay down debt, take bonus
same shit, different day
Obama is going to protect us
Feds unveil first set of fracking rulesLooks like a GREAT opportunity for some deathspiral financing here.
I'm going long shale oil because http://finance.yahoo.com/news/gartman-crude-could-hit-15-114809196.html
Who knew Wrong Way Dennis had started reading ZH? That article reads like Tyler Durden for Dummies, minus the snark.
Now the mining stocks have company. They've been trying to raise capital through share issues for years since credit has dried up for them. I was reading just a few days ago where JP Morgan was putting together a $300M fund to buy the mining companies. First they put them out of business by manipulating the gold and silver markets, then they buy them out at bankruptcy prices. I wonder what will happen to Allied Nevada now that it's gone under. Who's that slinking around the corner, why it's Mac the Knife back in town.
Please reference 'Diamond hoax of 1872'
There are a lot of crap small oil & gas companies out there, but the facts do matter to those interested in the truth. EXXI is for sure an over leveraged crap Company but it is not a shale producer. It produces exclusively from conventional reservoirs primarily in the Gulf of Mexico. To list it under a headline touting “shale” indicates the author of this piece is either clueless or lying. Also, to state “producers have to keep producing at a breakneck pace” makes no sense at all. As documented in ZH rig utilization is falling fast, especially from the financially stressed over-leveraged players. They simply don’t have the money to keep drilling. It is impossible for shale producers to keep producing at breakneck pace from high decline reservoirs without drilling more wells. The weak players are not drilling enough new wells to offset the decline in the currently producing wells. The whole ZH meme that current US production will stay high for a long time is based on flawed thinking. It can’t with a significant decline in investment.
might be a good deal if it's far enough below liquidation price and your time horizon is long enough to be well past the inevitable litigation delays
Not all toxic assets are created equal.
"Gonna have to return that F350 duelly if we don't do something fast."
Wow, selling shale oil stocks? That's like trying to sell vacation packages [at a premium price] at an Ebola ward...
oasis petroleum just diuted as well
The government prefers to bailout companies by purchasing their stock.
Good strategy idiots!
The signs of collapse abound.
(Told you so...)
Pay close attention to WLL over the next week. They have been trying to find a buyer now for two weeks and still no one wants to buy. It had some BS rumors of a buyout that sent the sock to 41 but those were all just bs rumors, just like the false lehman buyout rumors. I have been buying january puts on WLL during this pop. If they can't sell then they are a HUGE BK candidate. 6 Billion in debt, forced to drill at a loss to service that debt, up for sale but no one wants to touch it.......... I like my chances here but them being bought out or not is the biggest catalyst right now in the shale stocks. If another week goes by with no buyer then i expect all of them to crash hard over the next few months.
What strike?
30's and 25's, january.
What strike?
Have they rung up the Fed? Rumour has it the Fed is a willing buyer of all failing industries. The Fed also is rumoured (cnBS would deny this) to also be willing to hand freshly printed cash to insolvent entities at ZIRP for the use in buying back their shares.
I really don't see what the problem is here. Salvation is one phone call away.
Here we have what is knonw as a economic perpetual motion machine - this is the end of these naughty business cycles and recessions.
We have prosperity forever. All you need to do is take every dollar you have an put it into an index fund.
This is goddam incredible - I never thought I'd live to see the day.
And the thing is --- just like most great inventions --- it is so simple that it leaves me wondering why in the fuck did it take centuries to figure this out?