Oil Bankruptcies Hit Highest Level Since Crisis And There's "More To Come", Fed Warns

Tyler Durden's picture

“Two things become clear in an analysis of the financial health of US hydrocarbon production: 1) the sector is not at all homogenous, exhibiting a range of financial health; 2) some of the sector indeed looks exposed to distress [and] lifelines for distressed producers could include public equity markets, asset sales, private equity, or consolidation. If all else fails, Chapter 11 may be necessary.” That’s Citi’s assessment of America’s “shale revolution”, which the Saudis have been desperately trying to crush for more than a year now. 

As Citi and others have noted - a year or so after we discussed the issue at length - uneconomic producers in the US are almost entirely dependent on capital markets for their continued survival. “The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow,” Citi wrote in September. Here’s a look at what the bank means:

Of course this all worked out fine in an environment characterized by relatively high crude prices and ultra accommodative monetary policy. The cost of capital was low and yield-starved investors were forgiving, allowing the US oil patch to keeping drilling and pumping long after it should have been bankrupt. Now, the proverbial chickens have come home to roost. In the wake of the Fed hike, HY is rolling over and as UBS noted over the summer, “the commodity related industries total 22.8% of the overall HY market index on a par-weighted basis; sectors most at-risk for defaults (defined as failure to pay, bankruptcy and distressed restructurings) total 18.2% of the index and include the oil/gas producer (10.6%), metals/mining (4.7%), and oil service/equipment (2.9%) industries.” As Bruce Richards, chief executive officer of Marathon Asset Management told Bloomberg last week, "the price of a barrel of oil could fall below $30 due to a "glut of supply," and as many as a third of energy companies will default over the next three years." 

"This is the the worst non-recessionary year we’ve ever had for high yield," Richards said. New York-based Marathon has added to short positions on energy bonds, he said.

This week’s gains notwithstanding, and a likely misguided assumption about the impact the lifting of America’s crude export ban will have on WTI aside, the fundamentals here are a nightmare. Iraq is pumping at record levels, Iranian supply is set to ramp up starting next month, once sanctions are lifted, and OPEC is completely disjointed. Furthermore, producers are bumping up against the limits of how many jobs they can cut and how much capex can be slashed (ultimately, you have to retain enough human capital and capacity to remain operational). The takeaway: the bankruptcies are coming. 

As the Dallas Fed notes in its latest quarterly energy outlook, bankruptcies in the space are now at their highest levels since the crisis and things look bleak going forward. Below, find excerpts from the report.

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From The Dallas Fed

West Texas Intermediate (WTI) crude oil prices have fallen around 23 percent so far in the fourth quarter. Expectations have shifted toward a weaker price outlook because sanctions against Iran are likely to be lifted in early 2016, the Organization of the Petroleum Exporting Countries (OPEC) has scrapped any pretense of a production ceiling, and U.S. production declines have slowed. Supply Glut Drives Oil Prices to 10-Year Lows The imbalance in global supply and demand has led oil prices to slump to levels last seen over 10 years ago. World petroleum production will exceed consumption by an average of 1.7 million barrels per day (mb/d) in 2015, according to December estimates by the Energy Information Administration (EIA). This excess supply is higher than during the Asian financial crisis and the Great Recession. OPEC supply has bloated markets with nearly 1 mb/d more this year than what the EIA initially predicted in November 2014. In 2016, global supply is expected to exceed demand by 0.6 mb/d on average (Chart 1). 

At OPEC’s December meeting, the impending lifting of sanctions against Iran contributed to increasingly vocal dissonance within the cartel. The meeting ended in disarray, and oil ministers abandoned any pretense of a production ceiling for the first time in decades. A strong divide appeared to develop between Saudi Arabia and its Gulf allies on one hand and Iran and remaining OPEC members on the other. These divisions are driven by three underlying causes. First, there is strong disagreement on how to accommodate Iranian oil supply once sanctions are lifted as Saudi Arabia, Iraq and others seek to maintain market share. Second, heightened tensions in the Syrian conflict have deepened regional rivalries. Third, low oil prices affect member countries differently because of their different fiscal positions.1 These underlying causes will make any agreement on reinstating production ceilings or other coordinated action by OPEC unlikely in 2016. 

Oil and gas sector bankruptcies have reached quarterly levels last seen in the Great Recession. Lower oil prices have taken a significant financial toll on U.S. oil and gas producers, in part because many face higher costs of production than their international counterparts do. At least nine U.S. oil and gas companies, accounting for more than $2 billion in debt, have filed for bankruptcy so far in the fourth quarter. If bankruptcies continue at this rate, more may follow in 2016. Upstream firms have also adjusted to low oil prices by slashing capital expenditures; spending is down 51 percent from fourth quarter 2014 to third quarter 2015 (Chart 5).

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As Goldman put it earlier this month, "...we reiterate our concern that 'financial stress' may prove too little too late to prevent the market from having to clear through “operational stress” with prices near cash costs to force production cuts, likely around $20/bbl."

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db51's picture

Can't wait for sub $ 1.00 gas. and diesel.   Scrooge these a-holes for raping us over the past 40 years.  Will love to see Monsanto, Pioneer, Agrium and Potash Corp John Deer et.al  suffer the same fate.  Death to the Price Fixers.

Id fight Gandhi's picture

Some places will never see sub $1.00 with per gallon taxes up to 70¢

The losses have to be far worse with most of these being done with junk debt.


2008-2009 boom bust was a quick bounce back in oil. We ain't got that now.


Soul Glow's picture

One thing to consider is that the dollar could get crushed at any time.  All the other currencies have, and the dollar's time will come.  To think the Fed is an all powerful establishment from here until eternity is naive.  They are doing what they can while they can to make the rich riccher and the poor poorer until all the bubbles pop and they are forced back into a feudal time.

They want it to go on for as long as possible but all growth is finite and we will reach a hyperinflation of currency.  This will be global as all central banks are printing.  When that day comes the goal of the monied class is to have accumulated enough resources to pay the poor to continue to do their dirty work. 

The monied class won't care if the poor people have TV, or soda, or anything really.  They will be in castles on large acred land masses waited on by the poor just like when they were kings and queens.  This in the US, Europe, and Russia and China.

That's why it is important for the individual to buy silver and gold.  SIlver and gold is money and if one has it it means he has wealth.

brushhog's picture

You'll never see sub $1.00 gas. It costs $20 per barrel to get the easiest oil out of the ground. At $35 per barrel we were seeing the bottom ( or very close to it ). Oil has nowhere to go, long term, but UP. Too much demand. Those that have it have the entire modern world by the balls.

Mayer Amschel Rothschild's picture

Temporary bottom... <$10/barrel, <20 years

JustObserving's picture
Oil Bankruptcies Hit Highest Level Since Crisis

It is blowback from Obama's war against Russia's largest export and Putin. 

And American poodle Saudi Arabia goes along

Stakes are high as US plays the oil card against Iran and Russia

John Kerry, the US secretary of state, allegedly struck a deal with King Abdullah in September (2014) under which the Saudis would sell crude at below the prevailing market price. That would help explain why the price has been falling at a time when, given the turmoil in Iraq and Syria caused by Islamic State, it would normally have been rising.


Did the U.S. and the Saudis Conspire to Push Down Oil Prices?

Falling oil prices and the plunging ruble are not some kind of free market accident brought on by oversupply and weak demand. That’s baloney. They’re part of a broader geopolitical strategy to strangle the Russian economy, topple Putin, and establish US hegemony across the Asian landmass. It’s all part of Washington’s plan to maintain its top-spot as the world’s only superpower even though its economy is in irreversible decline.


Son of Loki's picture

Jobs drying up in Texas oil industry as gas prices drop



HOUSTON --With the price of gas dropping below two dollars a gallon in Houston, Peyton Gregory is saving money at the pump -- but low oil prices also cost her her job.


She was laid off from the hiring department of an oil services firm ten months ago.

"It takes two months of part-time work to equal two weeks of pay for what I was receiving at my full-time job."


I am Jobe's picture

Texas is going to hurt soon. Property Taxes, Gas Tax and Sales taxes will be going up soon. 

CheapBastard's picture

Houston oil and gas companies likely to freeze pay in 2016, survey says




Houston is already hurting bad from what I read. Even Texas Monthly, the biggest supporter of the Texas Boom wrote that other industries in Housotn (like health care) won't save it from a serious recession.


We'll see. But I also read the energy companies there have fired over 60,000 employees/engineers. That's quite a bite out of the economy as it trickles into restaurants, retail, housing ... oh wait, did I say housing?!


My bad; luckily, housing never drops! [.....until it does.....]

scintillator9's picture

Not only that, but the ancillary businesses that support the oil industry too, such as:

Jobs lost in transportation:


Cargo volumes at the railroad fell 6 percent in the second quarter of the year from 2014. Coal and crude-oil volumes fell especially hard, with drops of 26 percent and 29 percent, respectively. Lower oil prices led to reduced production from the shale fields served by Union Pacific.


Jobs lost in suppliers:


Chieftain Sand & Proppant Barron has laid off 63 employees at two plants in western Wisconsin; The layoffs are expected to be permanent, according to the filings. 


This is not even remotely scratching the surface.......

Son of Loki's picture

Moar bankruptcies = Moar destruction of the middle class = moar of Barry's "Change you can beleeve in."


" Forward, Comrades! "

Soul Glow's picture

The Fed warns?  Like they care.

Tinky's picture

More to come? Funny, they're arguing the same thing over at youdon'tfuckingsay.com

itstippy's picture

Congress will introduce bills authorizing massive expansion of the already huge subsidies to the oil & gas industry.

Oil & gas, healthcare, big ag, banking, aerospace, defence, and education can count on Uncle Sam.

GreatUncle's picture

Then taxes have to be raised and that implies even more public sector debt.

WTFUD's picture

Yeah, the FED's opinion and forecasts are right up there with a crack whore!

henry chucho's picture

The real insanity is that a pint of drinking water at Tesoro,now costs more than a gallon of regular unleaded..Thank God they never developed an auto that ran on water,it would cost me $500 to fill up the tank..

whidbey-2's picture

Of course, oil had to bleed. But it is not over lambs, this confession of oil vulnerability is going to become the hit song of consumer goods, medical care, foods, and all commodities by Q2 2016.  In other words, the knife is out and the Fed is living on borrowed time.  The real question is: will Yellen know when she must relent, retract and go QE?  Not likely, her script was written a decade ago when Greenspan could presist. Things were better then.   Own some precious metals, short a few stocks and Yes, hold the dollar if you would see spring 2016... before national bankruptcy.


Quinvarius's picture

I like how they pretend we are not still in what they called "the great recession".  We are in the Greater Depression.  We have been since at least 2009.

GreatUncle's picture

I only have one puzzling thought ... was it like this ... you still get the collapsed oil price.

I got a sneaky feeling this started out as a financial manipulation then we got a cascaded collapse.

With paper oil you fix the price and you have an economy that is struggling on life support. What better way to keep it going than to manipulate the price down through paper oil and no different to the suppression of the gold price. Politicians were all raving on about this people having more money to spend in their pockets so economy would pick up.

Now all of a sudden some oil states needing revenue to service existing debt are compelled to produce more to try and achieve the overall total.

All nations in this position now start producing not to match demand but to support existing debt and you can't even take your foot off the production level else you watch your oil revenues fall away.

That last point at current consumption rates how long will it take to clear the surplus oil because that is now becoming an obstacle to returning to stability.

Over production is manipulating the price down, similarly driving the price down on oil sensitive economies forces the production ever higher and BOTH CAUSE A SURPLUS that needs to be consumed before normality can be achieved.



Faeriedust's picture

It's called destructive competition, potlach syndrome, or The Tragedy Of The Commons (the commons in this case being the common price at which all sellers must sell in a single global market). It's a typical occurrence in an unregulated capitalist system, which demonstrates that classical and neoclassical assurances of the perfection of markets is bunk.

Oh, and market manipulation, like every other kind of fraud, is also typical in any system where material wealth is valued above honesty, honor, or any of those other smarmy old-fashioned ideals.  There's a reason why the old Catholic Church named Greed one of the Seven Deadly Sins.  Eventually it's usually as destructive to self as it is to others.

Merry Christmas, for those who still believe in Christ.

"God is dead. God remains dead. And we have killed him. How shall we comfort ourselves, the murderers of all murderers? What was holiest and mightiest of all that the world has yet owned has bled to death under our knives: who will wipe this blood off us? What water is there for us to clean ourselves? "   -- Nietzsche


Arthur's picture

No surprise here.

Over supply will destroy the inefficient and the under capitalized.

If you can identify the likely survivors (hint strong balance sheets) they will emerge much stronger and reward the pateint with huge gains.  Just look at the aftermath of the last two big down turns.

Stock pickers paradise, you don't want to be in broad market ETF or mutual funds here as sector auto piliot stock picking will have many losers.

CHoward's picture

Not that we're any where near it yet - but should prices drop too much - gas will simply no longer be made.  You cut your losses when it gets to a certain point.

CHoward's picture

Not that we're any where near it yet - but should prices drop too much - gas will simply no longer be made.  You cut your losses when it gets to a certain point.

brushhog's picture

Yes, gas will no longer be made.....until there is a supply shortage and the price shoots back up. Gotta love that invisible hand-job.

CHX's picture

These bankruptcies mark the epitome of cheap peak oil, and, by extension, the era of western supremacy. There is no hope as change is coming. Prepare accordingly, and good luck to all. Ah, yeah, merry X-mas to all out there.

kiwimail's picture

The world is only one geo-political event away from $100 oil. Because of the astronominic profits to be made by $100 oil I'm starting to wonder when an  "event" will occur and why it hasn't already happened.

Faeriedust's picture

Give it time.  I'd like another year of cheap oil to drive some of the frackers out of business, and let me settle my finances a little more.  But sooner or later, come it will.

CHX's picture

Bottom fishing is a dirty business, especially with oil.

Gregory Poonsores's picture
Gregory Poonsores (not verified) Dec 25, 2015 6:39 PM

I'm waiting to find out Iran needs investment to ramp up. Usually these flood the market stories have something hidden behind the curtain that's never revealed until the last second. "Oh Iran was gonna ramp up but it needs someone to pump in capital that ain't forthcoming at 35 bucks a barrel."


Need to remember all the Saudi increases this year came from a massve infill drilling program that was going on before 2015, some camel fucker just didn't turn on a tap. I'm skeptical Iran's just gonna drop another million barrels out there like that.

hedgiex's picture

Anybody see the flip side ? How the oil price collapse has been transmitted to the middle class in the reduction of their cost of living and they having more savings as a result ? That this transmission had not happened now means the game of extraction by the Predators is much alive. Preys still bother with all these BS of price collapse sufferings that impact only a group with vested interest at the expense of others.