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Giant Sucking Sound of Capital Destruction in US Oil & Gas
Wolf Richter www.wolfstreet.com
Chesapeake Energy is a good example. The second largest natural gas producer in the US, after Exxon, reported its debacle yesterday.
Revenues plunged 49% from the quarter a year ago, when the oil bust had already set in. The company has been slashing costs and capital expenditures. In June, it eliminated its dividend. And yesterday, it recognized $5.4 billion in impairment charges, bringing impairments for the nine months to a staggering $15.4 billion.
Impairment charges are a sudden accounting recognition of accumulated capital destruction. These impairments pushed its losses from operations to $5.4 billion in Q3 and to $16 billion for the nine months.
Chesapeake currently gets 72% of its production from natural gas, 17% from oil, and 11% from natural gas liquids. The oil bust has been going on since the summer of 2014. The US natural gas bust has been going on since 2009! Two natural gas producers have already gone bankrupt this year: Quicksilver Resources and Samson Resources.
Its annual free cash flow has been negative since 1994, even during good times, with only two tiny exceptions (Bloomberg chart). After living off borrowed money, it’s now trying to hang on by selling assets and lowering its mountain of debt. But it still owes $16 billion, much of which QE-besotted, ZIRP-blinded, yield-hungry investors had handed it over the years, based on hype and false hopes.
Its shares last traded at $7.50, down 75% from peak hype in June 2014. Its 4.875% notes due 2022 and its 5.75% notes due 2023, according to S&P Capital IQ LCD yesterday, traded for 66 cents on the dollar.
In terms of capital destruction, Chesapeake is in good company, and not even the leader. A new report by Evaluate Energy, which covers Oil & Gas companies around the globe, examined the financial statements of the 48 US oil & gas companies that have reported earnings for the third quarter so far. The amounts and the speed of deterioration are just stunning.
Turns out, what started in Q4 last year is getting worse relentlessly. And now it’s getting serious: plunging revenues, squeezed operating margins, whopping impairment charges, and horrendous losses are combining into a very toxic mix.
Evaluate Energy determined that net income of those 48 companies was a gigantic loss for the three quarters combined of $57 billion.
On a quarterly basis, the losses in Q3 jumped 58% from Q2 and 70% from Q1 to $25.5 billion. This fiasco, which has been spiraling down at a breath-taking pace, looks like this:
The biggest factor in these losses, as in Chesapeake’s case, was the impairments. For this study, Evaluate Energy only counted impairments of property and equipment, not of financial assets such as “goodwill.” Including charge-offs of goodwill, it would have been even worse (an example is Whiting Petroleum, which we’ll get to in a moment).
Of the 48 companies, 38 recognized impairment charges totaling $32.8 billion in Q3 alone, a 79% jump from Q2, when impairments hit $18.4 billion. Since Q4 2014, these 48 companies recognized impairments of $84.6 billion; 39% of that in Q3.
Devon Energy was king of the hill, with $5.9 billion in impairments in Q3, after having recognized impairments every quarter this year, for a total of about $15.5 billion.
Our natural-gas hero Chesapeake is in second place, if only barely, with $5.4 billion in impairments this quarter, and $15.5 billion for the nine months.
Of note, Occidental Petroleum, with impairments of $3.3 billion in Q3, Murphy Oil, Whiting Petroleum, and Carrizo Oil & Gas all recognized over 90% of their respective impairments this year in this misbegotten third quarter. They were in no hurry to grant their investors a peek at reality.
However, Whiting’s impairments of $1.7 billion do not include an additional $870 million in write-offs of goodwill in connection with its once highly ballyhooed acquisition of Kodiak Oil & Gas, which closed in December last year.
In Q4 2014, many investors thought the oil bust was a blip, that this was just a correction of sorts in oil prices and that they’d rebound in early 2015. But in 2015, oil and natural gas both have plunged to new cycle lows. And yet, over and over again, sharp sucker rallies gave rise to hopes that it would all be over pronto, that the price would settle safely above $80 a barrel, or at least above $65 a barrel, where some of the oil companies could survive.
But now that oil in storage is practically coming out of our ears, globally, the meme has become “lower for longer,” and the game has boiled down to who can slash operating costs and capital expenditures fast enough without losing too much production, who has enough cash to burn through while this lasts, and who can still get new money at survivable rates. And that game is accompanied, as in Q3, by the giant sucking sound of capital destruction.
Banks, when reporting earnings, are saying a few choice things about their oil & gas loans, which boil down to this: it’s bloody out there, but we made our money and rolled off the risks to others in a trade that has become blood-soaked. Read… Who on Wall Street is Now Eating the Oil & Gas Losses?
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All that printed "capital" has to be destroyed somewhere. Funny how it always seems to detonate in areas where actual wealth creation is done. A brilliant PhD candidate should write a dissertation about this.
Always nice to know our "allies" the Saudis, are destroying our oil business so we will still be dependent on them. I guess supporting ISIS and having a hand in 9-11 wasn't enough for them. With "friends" like that you don't need enemies.
How bout that silver/gold slam
Whatever. When there is no gas or heating oil available for delivery, then things might be "getting serious". NOT before.
I've never ever seen a situation like this before.....oh wait, it happens all the effing time!~!!!
Maybe Chesapeake will sell me a nice dually 4x4 flatbed for cheap.
They won't be needing it.
why worry about commodities anymore, just print more!
I <3 cheap gas.
Tis but a pit stop on the way to the end of the oil/gas age.
You're right, it's definately getting harder.
Not like the early 1900s when you could go out to a number of places in West Texas and pound pipe 1,200 feet into the ground to recover 75,000 barrels of oil a day for your trouble.
Now you spend a couple million drilling a horizontal well into a shale cliff and hope for 500 barrels a day for 6mos to a year.
Yet production is higher than in 1900. Irony.
And net energy is much lower.
Not really when you consider how many more wells it takes. That's just MATH.
Im sorry, did i break a physical law by recognizing how production is higher now?
yes, in quantum physics you can't know the position and velocity and you tried to do both.
Which plays right into the hands of those manipulating Brzezinski's "Grand Chessboard," as energy choke-points grow ever more valuable to those who ultimately control them.
A few nukes in the Middle East will fix this so there is always hope. /s
Or a nice war between "regional powers"?
You were a complete inbecile if you ever believed the US fracking industry was anything more than a false pretense for pump and dump schemes. If you did, you didn't do your homework, or you bought into the hype.
Its a legitimate industry with high costs. It came online before its time. Fast forward 10 years and conventional depletion+Chinese/Indian demand will let it flourish again.
The conventional oil industry was also in trouble in the early 90s when oil slipped under $7. Oh, that was also a pump and dump.
I was in North Dakota recently and was shocked, appalled and utterly devastated by the environmental damage up there, not to mention all the cheap ass contrucction of lousy housing and fact food outlets. The place is wrecked. Fracking is a cruel joke.
It always looked like that, except now the landscape is dotted with wells and tanks for storage. Before the "boom" NOTHING was there, so you're full of shit about how it was wrecked. Unless of course you think flat prairieland is a piece of heaven.
I don't think you could have posted a more biased comment.
I guess that makes me a complete imbecile. The industry seems a little complex to reduce to a pump and dump.
If it was a scheme, it was a rather elaborate one, involving tens of billions of dollars and tens of thousands of workers. Also, they mainained the facade for years before winding it down.
Dunno, it's certainly a cluster-f*ck, but I think the dumb bastards actually believed the recoverable reserves numbers in the beginning.
It was simply the last place left to achieve positive ROI in ZIRPWorld. Then suddenly, demand evaporates as it too was debt-fueled.
Where's Mother in this queue? Nary a mention of Exxon, the heavily weighted former no. 1 darling of the S&P 500. Oh wait. She's currently under investigation by the NY AG's office for climate change research fraud. I say "she" because corporations are people too. If you can't get em with HFT algos then its time to move the goalposts. Enter Attorney General Schneiderman, champion of environmental concerns. Protecting endangered species is what matters, creatures like the Vampire Squid and the Morganuspus. Investors shouldn't rush to judgment or deign place blame on investment banks for this unfortunate completely unforseen occurrence in the oil and gas markets.
Thank The Saudis for crashing the price of energy, perhaps with a little assistance on the broader political front to crush Russia? How is that going?
I still say that this narrative is more of an after the fact blame-game, as prices would've crashed regardless of what the Saud's are doing.
You simply cannot build up an industry on leveraged debt when there is no future of sustainable demand. Mises laid all of this out nearly a century ago.
mises knew about fracking, he tried to warn us. the feds are fracking the dollar.
thank the fed with zirp and qe stimulas. without it and market discipline none of this would be happening. fascism, what is the future now. the fed is the enemy from within that is destroying freedom...
Yep, the Fed created this monster, but the oil patch is the obvious problem. things are just as bad or worse in all the other economic sectors. Of course when all the defaults start, it will be a complete surprise to all the financial Frankensteins who created the monster......
Yep, and I lost $46k in the oil producers market last year. Lesson hard learned, trust nobody.
damn frackers frakin things up for the nyc.saudi production suppression cartel
FOSSIL fuels my azz