"On The Cusp Of A Staggering Default Wave": Energy Intelligence Issues Apocalyptic Warning For The Energy Sector

Tyler Durden's picture

The Energy Intelligence news and analysis creator and aggregator is not one to haphazradly throw around hyperbolic claims and forecasts. So when it gets downright apocalyptic, as it did this week in a report titled "Is Debt Bomb About to Blow Up US Shale?", people listen... and if they are still long energy junk bonds, they panic.

The summary:

"The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices -- which few experts foresee in the near future -- an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. How bad could things get?"

The full report by Paul Merolli, a senior editor and correspondent at Energy Intelligence:

Debt Bomb Ticking for US Shale

The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices — which few experts foresee in the near future — an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. How bad could things get and when? It increasingly looks like a number of the weakest companies will run out of financial stamina in the first half of next year, and with every dollar of income going to service debt at many heavily leveraged independents, there are waves of others that also face serious trouble if the lower-for-longer oil price scenario extends further.

"I could see a wave of defaults and bankruptcies on the scale of the telecoms, which triggered the 2001 recession," Timothy Smith, president of consultancy Petro Lucrum, told a Platts energy conference in Houston last week. Much has been made about the resiliency of US oil production in the face of low prices, but the truth is that many producers are maximizing their output — even unprofitable volumes — because they need the cash flow to service their debt (related). "As an industry, we're at the point where every dollar of free cash flow now goes to paying back debt," Angle Capital's Steve Ilkay told the same conference. Ilkay, who advises North American producers on asset management, said during the boom years of 2012-14 about 55% of the sector's free cash flow, which is calculated by subtracting capital expenditures from operating cash flow, was allocated toward debt repayment.

With West Texas Intermediate (WTI) stuck below $50 per barrel since August — and closer to $40 recently — the industry has responded with deeper cuts to capex and a greater focus on efficiency (EIF Nov.4'15). However, experts say this won't be enough to avoid a bloody reckoning with persistent low oil and gas prices, as the sector grapples with some $200 billion-plus in high-yield debt, which it absorbed to finance the shale oil boom. Credit quality has been steadily deteriorating since June 2014, when WTI peaked at $108/bbl. Standard and Poor's says there have been 19 defaults so far in 2015 across the US oil and gas industry, while another 15 companies have filed for bankruptcy. Besides those that have missed interest or principal payments, the default category also includes companies that have entered into "distressed exchanges" with their creditors, including Halcon, SandRidge, Midstates, Goodrich, Warren, Exco, Venoco and Energy XXI (EIF Jul.8'15).

Of the 153 oil and gas companies that S&P applies credit ratings to, roughly two-thirds are E&P firms. Among these E&Ps, 77% now have high-yield or "junk" ratings of BB+ or lower. 63% are rated B+ or worse, and 31% — or 51 companies — are rated below B-. What does this all mean in layman's terms? "Quite frankly it's a lot of gloom and doom," says Thomas Watters, managing director of S&P's oil and gas ratings. "I lose sleep over what could unfold." He says companies with ratings of B- or below are "on life support," while those further down the ratings scale at C+ or lower are "maybe looking at a year, year-and-a-half before they default or file for bankruptcy." While capital markets were still open to struggling E&P firms in the first half of the year, they are closing fast as investors accept a "lower-for-longer" oil price scenario. High-yield E&P firms raised $29 billion from 44 issuances of public debt in 2014. So far in 2015, $13 billion in junk-rated debt been raised from 23 issuances — but only two have come after June (EIF Jul.29'15).

After posting negative free cash flow of $24 billion in 2015, capex cuts and efficiency measures should help the industry post positive free cash flow of $8 billion in 2016, S&P reckons. However, the high-yield E&Ps are expected to see negative free cash flow of $10 billion, so the group that can least afford a cash crunch will get just that. Better hedging could have helped, but data from IHS Energy shows a woefully under-hedged E&P sector in 2016. Small producers have 27% of their oil production hedged at an average price of $77/bbl; midsized firms have 26% hedged at $69; and large producers have just 4% hedged at $63. That is much less protection than E&P firms had in place for 2015 (EIF Aug.19'15).

Small and midsized producers, which rely heavily on revolving lines of credit with banks, have not yet seen these liquidity lifelines cut off. Some analysts were shocked after banks reduced lines to credit to E&Ps by just 10% on average during October redetermination negotiations (EIF Oct.14'15). Banks appear to be putting off the inevitable in hopes of a price rebound. Many have been using price forecasts above the average 12-month forward strip — suggesting the pain could extend to energy lenders if markets don't recover as they expect. Heading into October redeterminations, Macquerie Tristone's energy lending survey showed banks using an average 2016 WTI price outlook of $54. That has since dropped to around $47 this quarter — closer to the $46 indicated by the Nymex strip.

Yet another source of concern for E&Ps and their lenders are price-related impairments and asset write-downs (EIF Nov.11'15). Year-to-date, there has been $70.1 billion in asset write-downs in 2015, approaching the $94.3 billion total for the previous 10-year period of 2005-14, according to Stuart Glickman, head of S&P Capital's oil equities research. And he expects even more write-downs and impairments to emerge at year-end. "Companies are putting this off for a long as they can. You don't want to be negotiating in capital markets with a weakened hand," says Glickman. This will be a problem up and down the E&P sector, not just for the little guys. Chesapeake Energy, one of the largest US independent producers, shocked earlier this month by indicating a $13 billion reduction in the so-called PV-10, or "present value," of its oil and gas reserves to $7 billion. Had Chesapeake used 12-month futures strip prices — instead of Securities and Exchange Commission-mandated trailing 12-month prices for PV values — the value would've fallen to $4 billion. "That's staggering, just alarming to me," said Watters, noting that E&P firms' borrowing capacity is contingent on such measures (EIF Jul.22'15).

Many believe all of these issues will come to a head in first-half 2016, as the effect of fewer hedges is felt and banks once again reassess credit lines in April. Pitifully low natural gas prices could also play a big factor, especially if the US experiences a mild winter. The confluence of these factors could be the catalyst that finally spurs a long-awaited tidal wave of mergers and acquisitions throughout the sector (EIF Oct.28'15). News of rampant defaults, bankruptcies and write-downs, combined with closed capital markets, might be enough to lower upstream asset valuations to the point where buyers and sellers can more easily agree to deals. Watters describes an "M&A playland" for strong companies with investment-grade credit ratings, noting that the six largest integrated majors together hold a war chest of some $500 billion. Smith says it could be a great opportunity for majors to improve their positions in US shale, where they were famously late in the game. "Some of the best shale acreage is held by companies with poor balance sheets. It seems like a natural fit," he says.

But there's also some $100 billion in private equity sitting on the sidelines, meaning majors and large independents may face stiff competition (EIF Oct.28'15). Anadarko has openly complained about being outbid for assets by management teams backed by private equity. "Does that mean we're overpaying? No," insists one private equity executive. "It means we're willing to pay a bit more because we think our guys can run the assets better than some larger outfits, who can struggle with cost structures."

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Jack Burton's picture

Debt Bomb Ticking for US Shale

I made lots of posts over the last year saying just the same thing, especially about shale. Most of the true believers in shale, who spoke in support of it's future, had direct connections to employment or investment in this sector. Anyone outside the industry, who runs the numbers knows that they don't add up. The industry is still alive because of their hedges, which have now run out. Fracking needs at least 80$ a barrel, and $120 long term in order to return profits, pay down debts and invest to keep the fracking wells producing. Face it! The American and Saudi war to bankrupt the Russian Federation has BACKFIRED! Big time1

uhland62's picture

I never dared saying it, that it was a concerted effort by Saudi and the US to bankrupt the Russian Federation, but suspected it for a long time. It is just another example of doing one thing and not being able to assess the side effects or even if your main effect will actually happen. Just like in Libya and Iraq and Syria and Afghanistan - the headless chuck brigade was at it again.

philipat's picture

Yes, the US neocons/CIA seem to have become quite expert at implementing poicies without any strategic vision or plans. The results have been a consitent fuck up, Syria being the most recent example

azusgm's picture

It depends on what the goal may be.

G.O.O.D's picture

the message of the Georgia Guidestones











azusgm's picture

Georgia Guidestones. Exactly what I was thinking.

We have some arrogant, sick puppies running the show. To them, we are a cancer on the earth. The words "climate change" could have been carved into those stones.

Motasaurus's picture

The end goal can only be the complete destruction of the United States. I am utterly convinced that this is the goal of the bankers who are funding the MIC. 

London has never forgiven her colonies for the revolution, and though her full revenge has been a long time coming, it is all the sweeter for it.

London created the house of Saud. London created Israel. London conquered the United States in 1913, and has used her most cruelly ever since as global bully boy, expending the blood of her sons and daughters to keep all of London's conquests in line.

Saudi Arabia cut the oil price to hurt the United States, and the politicians in the States were fooled into accepting it as an "attack on Russia".

The enemy is not without. It has been within all along. 

Rage Against Your Face's picture

City of London Corporation (the Square Mile)

Bendromeda Strain's picture

smh that someone would neg you w/o a comment. Too many pussies on ZH these days. To bolster your point, The City has its own mayor, unlike lower Manhattan. Maybe they were focusing more on Buckingham Palace?

thesonandheir's picture

I for one welcome our old British overlords.

Consuelo's picture

"I welcome you to Crackerbox Palace, we've been expecting you..."



booboo's picture

"The enemy is not without. It has been within all along."
Make up your mind, you just said it was the queen

Motasaurus's picture

The Queen is not London. The banks are - and the banks are most definitely within.  

stant's picture

And why are they in Georgia ? They belong in one of those county sized states up north who think they can rule the world

Bendromeda Strain's picture

Maybe Turner put up some of the cash...

Unix's picture
Unix (not verified) G.O.O.D Nov 28, 2015 9:46 AM

yes, you have done your homework GOOD...

there is a lot more out there to give you a glimpse of what is to come, those assholes have to tell us what they are doing next, it's in their charter. They do it with impunity now, because they have dumbed down the population sufficiently, and sit with their brandy and fat cigars laughing at us every day.


face plant...

Bendromeda Strain's picture

The original murals at Denver Airport were very specifically commissioned, what the artist or Snopes says now is irrelevent.

KJWqonfo7's picture

They beat the hell out of the Russian economy and as a happy bi-product killed big oil.

All this neocon talk is misguided. This is the left "WINNING"!

sun tzu's picture

Big oil will be fine. It's the little guys that are getting killed

AGuy's picture

"I never dared saying it, that it was a concerted effort by Saudi and the US to bankrupt the Russian Federation"

All commodities have crashed, not just Oil. Since Russia does not export Copper, Steel, Iron Ore, Cement, etc its unlikely the collapse in Oil and Gas has anything to due with Russia. The Debt bubble in the Asia, and South America has popped and demand for all commodites has collapsed.


Scooby Dooby Doo's picture

Remember when the horseface paid a visit to Saudi royals?

They want to bankrupt all the weak hands in shale so the wall st joos can own it.


aurum4040's picture

You're a complete idiot if you think the oil price collapse doesn't have anything to do with Russia. Run the Ukraine, Syria, Saudi, Qatar, Turkey, pipelines, Al Nursra, ISIS, CIA timelines through your head. As soon as Russia annexed Crimea aka CIA fuckup and then the Syrian war aka CIA fuckup didn't happen as planned in September 2014, what happened to the price of oil? It mysteriously collapsed after Kerry met with the Saudi douchebags planning to over pump oil supply which is absolutely insane if you really think about it. Who runs a business with the intent of pushing prices and profits down by 50 % all while USD are being printed at record pace? No one does without the money printing shit let alone wwith it and that's why it's a scham to crush Russia which has also failed miserably. These are all last ditch panic efforts of the failing USD reserve currency and MIC. Come on man, wake up. 

Almost Solvent's picture

It's not one or the other - Asia has fueled the general commodity crash, while oil was a target against Russia. 




Jack Burton's picture

I agree of course. But don't discount the Saudi/ US connection too much.

Jack Burton's picture

America's Washington Neo-Cons are incompetent at best. Their  Monomaniacal imperial world view is so focused on the Russian Federation that they can't see anything else. It is this group who believe they can create ISIS and then run it as a CIA Asset to take down governments it want's changed, and to focus ISIS against Central Asian nations, followed by Russia and China.

Money_for_Nothing's picture

How would it look different than today if the old USSR put a plan in place to take out the US? Elect a communist that pretends to be a christian and a muslim at the same time. Bribe and blackmail the 1,000 or so people in DC that wield real political power. The funny thing is Russia will suffer when the US falls. USSR couldn't anticipate their own fall.

Fascist Puppy's picture

Maybe inbreeding isnt so smaht. 

philipat's picture

Oh what a tangled web we weave......

Niall Of The Nine Hostages's picture

The energy sector's creditors know the Saudi oil dumping isn't sustainable. It just has to be maintained long enough to drive the owners of the oil claims into bankruptcy and hand over the claims to the banksters.

Short-term, working-class whites will be cheated out of their best chance at living wages in decades. Long-term, Wall Street gets oil for a fraction of what it will fetch when the Sauds are driven from Riyadh and oil returns to fair value.

It's a hedge against Eurasia and its oil's slipping from their grasp completely. If they can't steal Russia's oil, they'll settle for Alberta's.

Volkodav's picture

Yes, I remember your predictive ideas on this subject.

From some knowledge of Okla oil biz, fully expected terrible

economics. Oil busts come there after boom every couple decades or so, some

large, some less.

Coming Earthquakes did not take geologist to predict, either.



Kirk2NCC1701's picture

Ad I recall, wasn't it Porter Stansbury, who said that US shale would kick Saudi Ass, and predicted the impending doom for the USD three years ago?

Omen IV's picture


why? if Exxon has $300 Billion + in cash and the majors end up with the domestic assets - whats bad about that? - what was unplanned? - the fallout is marginally Russia since they had little debt to begin with - and therefore are not going to firesale the national assets - in fact Exxon has left Russia over a year ago -

The Parties losing are "primarily" American investors, management, banks, bond holders, and the entire service cos. industry. More than any other group in the world of oil and gas.


In 86' the entire domestic industry went down with the Reagan destroy Russia Plan - but so did the Russians - this time Putin and Prudence saves Russia!



Money_for_Nothing's picture

Before 86. Carter's sweaters and 55 destroyed the domestic industry. Carter's Oil Glut killed Russia but Reagan was able to take the credit because Carter is a communist and would deny he had anything to do with destroying his beloved USSR.

uhland62's picture

We all know that the global debt or default bubble will burst. It's like the lemmings, queuing up for the cliff. 

Spiritof42's picture
Spiritof42 (not verified) Nov 27, 2015 9:40 PM

This is how it goes down. One wave of defaults is not enough. But as the waves come faster and bigger, the economy has no time to recover. 

Okienomics's picture

Most erotic post of the day!

Spiritof42's picture
Spiritof42 (not verified) Okienomics Nov 28, 2015 11:46 AM

She looks even better nude.

medium giraffe's picture

Release the Kraken Mr Yellen! MWAAHAHAHAHAHAHAHAHA!

monk27's picture

She is the Kraken, and is now in full action...

medium giraffe's picture



I refute your hypothesis entirely.

DeadFred's picture

And I, for one, don't want to see definitive proof one way or the other.

Ms No's picture

Barring that they are getting them for free why would the majors want to jump in on these shale assets?  People have referred to these expensive to produce wells and decline rates as the equivalent to scraping a pot pipe.  So why would they want to jump in and scrape the pipe again... second scraping has to really taste like shit. 

Are they printing the money to buy this crap for them or what?  In the article they said "Small and midsized producers, which rely heavily on revolving lines of credit with banks, have not yet seen these liquidity lifelines cut off."  

Why the hell is that?  Do they have to prop it up to keep the whole ponzi going or is this part of a national security issue/flooding the market and it was never meant to make money?   

azusgm's picture

If the price is right, in Texas the majors (or any player with money) can buy units from distressed players, choke down production, and keep the leases active. They can leave most of the hydrocarbons in the ground and tap them later when the market is better. Some of the older leases still in force pay royalties at 1/8 and the mineral owners have to pay a portion of the gathering and transmission costs. That is very favorable for the producers.

I received a royalty check that was 2/3 of gross because of the gathering and transmission. Some of the wells in that field yielded negative returns for me.

kliguy38's picture

SHIT....this is just foreplay for what these psychopaths are going to unleash

The Duke of New York A No.1's picture

All those Mutts that are going broke in the energy business can thank Turkey for buying ISIS oil and flooding the energy market with 1/2 price off oil.

KJWqonfo7's picture

Drop in the bucket?.

You can thank Erdogan and Mini Erdogan for filling his own pockets and not giving a shit about the rest of humanity.

I think all the big brain thinking that involves killing the energy industry (which is the goose that keeps laying golden eggs) goes to the American political left.

Victor999's picture

There is no 'left' nor is there a 'right'...there are only bankers.

WhackoWarner's picture

Oh shite?  Who'd a thunk this would happen.  And is only the beginning.  Real problem is how to deflect the blame away from the sources of this nonsense.  I posit it must be me.  All my fault for working, getting out of debt, saving in PM's, joining a Credit Union, buying locally, stockpiling food,,,must be my fault.


Now the meme is going to go this way.  IF WW3 cant be integrated into life. (whereby millions of innocent young people are murdered for lies).  If it cannot be passed off that millions need to die for profits of  few...OH WELL must be my fault that I did not shop enough.


I take the blame and say screw you.