Is Wall Street Funding A Shale Failure?

Tyler Durden's picture

Authored by Nick Cunningham via,

The latest figures from the EIA show that despite some hiccups, the shale rebound is still on track. Last week, the sharp drawdown in inventories made headlines, but buried within the weekly figures was a bounce back in oil production, reigniting fears that the market will take much longer to balance.

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The U.S. shale industry has already added almost a half million barrels per day since the end of last year, taking production up to 9.3 million barrels per day (mb/d). But production is expected to continue to grow rapidly, with projections putting output at a record-high 10 mb/d by next year.

The coming wave of new supply will only be possible with the generous help of Wall Street. According to the Wall Street Journal, major banks and investors have showered the industry with credit and equity, pouring an estimated $57 billion into the sector over the past 18 months. All of that money is being translated into a sharp rise in drilling even as oil prices slump.

But while individual companies hope to attract investors and boost profits by ratcheting up production, the industry as a whole is shooting itself in the foot. Some less efficient drillers are increasing production but losing money on every barrel produced.

There is a growing recognition that loose money and easy credit is helping contribute to another downturn in prices. “The biggest problem our industry faces today is you guys,” the CEO of Anadarko Petroleum, Al Walker, said at an investor’s conference in June, according to the WSJ. “It’s kind of like going to AA. You know, we need a partner. We really need the investment community to show discipline.”

Investors hungry for yield are throwing money into companies who then drill more, and the surge in production is hurting the industry as a whole. Despite efficiency improvements, the shale industry is expected to be cash flow negative by a combined $20 billion this year as oil prices sink.

The energy sector, by some estimates, has been the worst performer this year for investors, so many are getting burned even as they keep the money taps open. Whether in terms of commodity prices (energy fell 11 percent in the S&P Goldman Sachs Commodity Index) or individual companies (73 of the 90 companies in the MSCI World Energy Sector Index saw their share prices decline in the second quarter), the oil and gas industry has not been a great space to be in.

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Investors are slowly waking up to the idea that they may not be able to make juicy profits by betting on a sharp rebound in oil prices. There is some early evidence that Big Finance is pulling back, with new equity issuance down recently.

Even if Wall Street starts to cut back on its investments in shale, it will take time for that spending contraction to show up in the production data. There is a roughly six-month lag time between the decision to begin drilling and oil showing up in the market, so the rush of new drilling that began in the first half of 2017 will ensure that production likely continues on its upward trajectory for the rest of the year.

But lower prices will ultimately cut into U.S. production, even if that doesn’t occur until 2018. According to Bank of America Merrill Lynch, a $1 per barrel increase or decrease translates into the addition or subtraction of 100,000 bpd of supply. As a result, “[w]ithin a $20 band, you get an almost 2m b/d swing,” said Francisco Blanch, Bank of America’s global head of commodities research, according to the FT. So while 2017 production will probably continue to increase, the outlook for 2018 is still sensitive to prices.

Nevertheless, the current oversupply woes have forced investment banks and other oil analysts far and wide to downgrade their oil price forecasts. For example, Bernstein Research slashed its price forecast for 2017 and 2018 from $60 and $70 per barrel, respectively, down to just $50. Bernstein doesn’t see oil averaging $60 per barrel before 2019.

Drastic cuts to oil price forecasts are spreading. BNP Paribas just axed its 2018 forecast for Brent by $15 per barrel to a lowly $48.

If those depressed price levels stick around, Wall Street will likely grow tired of shale drilling and start taking its money elsewhere.

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LawsofPhysics's picture

Yes, because just like the "market", oil/energy prices are now political tools.

Besides, talking about "prices" in the absence of a mechanism for true price discovery is a fool's errand. Move along.

Jim Sampson's picture

Let's just say they're not not funding it.

LawsofPhysics's picture

indeed, better define "money"...


"Full Faith and Credit"

dilligaff's picture

You forgot to add - "Motherfuckers!"

UnpatrioticHoarder's picture

What if the ESF/CIA/Fed organise fictional domestic US oil production and consumption numbers to maintain the illusion of a growing US economy and "energy independence"? Is that why "Wall St" throws money at the sector?

silvermail's picture

Damned Russian hackers destroyed the profits of the US shale industry!

samsara's picture

"...but losing money on every barrel produced."

We're losing money per unit, but we will make it up on volume

Quantum Bunk's picture

Shale never capitulated

Shale has never seen an actual recession

Shale lives off of cheap credit from mercantalist/Petro dollars

Shale has never existed in an interest rate enviroment


troubledasset's picture

Almost true. Hydraulic fracturing within shale formations started with the gas plays before Zirp.

Fartboxbuffet's picture

No wallstreet wouldnt do that

Justin Case's picture

I would have been shocked if they weren't funding these major campaign contributors, hell they even gave one seat to Tillerson. He's so welcome, prob bought the seat.

swmnguy's picture

So basically, The Squid is buying the US energy industry.


LawsofPhysics's picture

Please, if you could create "money" with no real work and no real risk you could BUY/OWN EVERYTHING!!!

NoWayJose's picture

Nice rally this week - off the morning lows when the squid came out with its sub-$40 call!

debtor of last resort's picture

The system is insolvent. Bad oil debt will be greased with printed currency. End of story. That is, until the currency implodes, then we'll have new fairy tales.

Too-Big-to-Bail's picture

The shale game is all about sleight of hand

Glyndwr will return's picture

Institutionalized state sponsored corruption and environmental degradation at the price of US citizens lives, wellbeing and future. All possible via money printed out of thin air and charged at zero %. Pathetic America on full display - and all just to weaken supposed enemies. Sorry but shale makes you look like sorry pathetic people . It simply should not exist until oil is at $200 and even then the EROIE is only 5 to 1.

LawsofPhysics's picture

correct. Despite all the bullshit hype about "green technology" the world still runs on reduced hydrocarbons and calories. Most humans are idiots and think in terms of "money", not calories.

Ignorance is bliss's picture

If we didn't have fraudulent energy markets then we'd be OPEC's bitch. If we didn't have home grown fraudulent shale we would have to pay their price or walk... let that sink in.

dicksburnt's picture

What Wall St. is funding is cheap soovie juice to keep the high profit prickup trucks flowing out of the UAW factories.  I know 3 people who gave up on pickups as soon as gas hit $3.80 a gallon.  Guess what they drive today? "They're ba-a-a-a-a-a-ck"

Ulitmately this "bad debt" will be package and uploaded to the FED soon enough.