Peak Shale: Anadarko Just Became The First US Oil Producer To Slash CapEx

It appears that Horseman Global's Russell Clark may have been spot on with his bearish take on the US shale sector.

As a reminder, in his latest letter to investors, Clark said that "the rising decline rates of major US shale basins, and the increasing incidents of frac hits (also a cause of rising decline rates) have convinced me that US shale producers are not only losing competitiveness against other oil drillers, but they will find it hard to make money.... at some point debt investors start to worry that they will not get their capital back and cut lending to the industry. Even a small reduction in capital, would likely lead to a steep fall in US oil production. If new drilling stopped today, daily US oil production would fall by 350 thousand barrels a day over the next month."

What I also find extraordinary, is that it seems to me shale drilling is a very unprofitable industry, and becoming more so. And yet, many businesses in the US have expended large amounts of capital on the basis that US oil will always be cheap and plentiful. I am thinking of pipelines, refineries, LNG exporters, chemical plants to name the most obvious. Even more amazing is that other oil sources have become more cost competitive but have been starved of resources. If US oil production declines, the rest of the world will struggle to increase output. An oil squeeze looks more likely to me.

While the bearish thesis has yet to play out, moments ago Anadarko poured cold water on US energy investors after it missed earnings badly, reporting a Q2 EPS loss of 77c, more than double the 33 cent loss expected. However, what was far more concerning to shale bulls (and perhaps oil bears), is that the company admitted that it can no longer support its capital spending budget, and it would cut its 2017 capital budget by $300 million, becoming the first major U.S. oil producer to do so, as a result of depressed oil prices. In March, Anadarko had forecast total 2017 capex of $4.5 billion to $4.7 billion, a continuation of the recent CapEx rebound which troughed in Q3 2016.

Ahead of the Tuesday earnings call, APC CEO Al Walker confirmed Wall Street's growing fears that oil prices are simply too low to sustain ongoing exploration when he said that "the current market conditions require lower capital intensity given the volatility of margins realized in this operating environment. As such, we are reducing our level of investments by $300 million for the full year."

Ironically it was Walker himself who issued a clear warning to Wall Street in June, when he bought up something we first covered in April of 2015 in "When QE Leads To Deflation: A Look At The "Confounding" Global Supply Glut", when he said that it was the relentless supply of cheap capital that was masking the underlying lack of profitability and allowing shale companies to pump beyond the point of negative returns: “The biggest problem our industry faces today is you guys,” Al Walker, chief executive of Anadarko Petroleum Corp. told investors at a conference last month, quoted by the WSJ.

Companies have more capital to keep drilling thanks to $57 billion Wall Street has injected into the sector over the last 18 months. Money has come from investors in new stock sales and high-yield debt, as well as from private equity funds, which have helped provide lifelines to stronger operators. Flush with cash, virtually all of them launched campaigns to boost drilling at the start of 2017 in the hope that oil prices would rebound.


The new wave of crude has again glutted the market. The shale companies are edged even further from profitability, and a few voices have begun to question the wisdom of Wall Street financing the industry’s addiction to growth.


Wall Street has become an enabler that pushes companies to grow production at any cost, while punishing those that try to live within their means, Mr. Walker said, adding: “It’s kind of like going to AA. You know, we need a partner. We really need the investment community to show discipline.”

Ultimately, it was up to Walker to demonstrate that discipline when he voluntarily reduced the amount of capital he would reinvest in his business. And since oil exploration is by far the most capital intensive industry, the hit to revenue will be quick and painful, much to the delight of OPEC which may finally be seeing light at the end of a long, dark tunnel. To that point, Anadarko also said it was trimming its 2017 production forecast to 644,000 bpd, a 2% cut.

Incidentally, Horseman is not the first to turn bearish on shale. As Bloomberg reported earlier, Goldman Sachs Asset Management has been shedding oil and gas-related company bonds in the past few months and shorting oil in some portfolios, according to Mike Swell, the firm's co-head of global fixed-income portfolio management. The investment manager has moved from an overweight position in energy-related corporate bonds a few months ago to neutral today and toward an underweight stance, he said in an interview on Friday.

Some investors seem to agree with Goldman's asset-management arm, at least enough to have a touch of skepticism about the prospect of these oil and gas explorers. Since the end of January, credit traders have demanded slightly more yield to own junk-rated bonds of oil and gas companies than other high-yield debt.

In an amusing twist, we reported last week that the very same Goldman reported last Friday that energy junk bonds are finally starting to notice the decline in oil prices:

Once the APC news reverberates across the industry, this may just be the straw that breaks the energy junk bond market's back, as a scramble out of the sector ensues, resulting in the double whammy of also yanking much needed capital from shale companies.  Such an exodus could not come at a worse possible time: as Bloomberg calculated if oil prices were to stay below $47 a barrel, "investors will demand a bigger cushion of extra yield to own junk-rated energy debt. Part of the reasoning is that these firms still require an excessive amount of leverage (and investor faith) to keep operating as junk-rated oil and natural gas producers have more than $25 billion of credit-line commitments expiring in 2019. If oil prices don't rebound, banks have good reason to reduce those lines substantially, siphoning off a crucial funding source."

Think a rerun of the late 2015/early 2016 period all over again.

However, while the Anadarko news is clearly negative for its shale peers, most of whom are set to announce similar capex declines, it will likely end up being positive for oil prices as much of the "swing" crude production courtesy of the US shale basin is about to be reduced substantially, in a clear victory for OPEC which has been waiting long for just this day.

Anadarko's CapEx cut also comes in the same month as the EIA announced that US shale production just hit a new all time high of 5.472mmb/d.

To the disappointment of many energy bulls (and oil bears as a reduction in production means that the shale supply glut is about to get far smaller), it may be all downhill from here.


nuubee Mon, 07/24/2017 - 17:40 Permalink

Cmon American consumer, get out there and burn energy, or something.... The American elite/Financial Sector is counting on you!!

SubjectivObject nuubee Mon, 07/24/2017 - 21:58 Permalink

The "first company"?Where did this energy industry recession these past years come from anyway?I've seen capex cuts for, like what, the last 4-5 yearsThe only one's doing anything are the refiner/chemical operators, because the feed stock is cheap and theres' spare capacity to schedule shutdowns and turnarounds.  If demand stays down, that dies too.

In reply to by nuubee

Bobbyrib Mon, 07/24/2017 - 17:50 Permalink

TPTB got sick of cheap oil. First the Saudis cut, now a domestic producer cuts.. I wonder when we will be paying the same as Europeans for gas (petrol).Everyone who bought a brand new SUV/Pickup truck and does not need it for work is about to be taken to the cleaners.

Bobbyrib Mon, 07/24/2017 - 17:50 Permalink

TPTB got sick of cheap oil. First the Saudis cut, now a domestic producer cuts.. I wonder when we will be paying the same as Europeans for gas (petrol).Everyone who bought a brand new SUV/Pickup truck and does not need it for work is about to be taken to the cleaners.

Sid Davis Mon, 07/24/2017 - 17:55 Permalink

And this is how oil will come to an end as an energy source. There will be plenty of oil in the ground, but it will not be economical to produce.

When it takes more energy to get oil products out of the ground and to the market place than is in the original barrel, no oil company will explore or drill. And since the industrial age is heavily dependent, either directly or indirectly, on oil, that age will come to an abrupt end. The world population will take a dramatic nosedive without the output from the industrial age to support all 7+ billion of us.

Shale oil, tar sands, and deep water oil are (or were) the last desperate efforts to prevent this unfortunate end of economic activity as we currently know it.

Hubbs Sid Davis Mon, 07/24/2017 - 20:17 Permalink

Hi Sid, I have been trying to figure it out. Hills group says oil price collapse because the lack of oil due to EROEI means the economy goes down faster than the decline of oil production? So if not enough oil to grow the economy, the declining oil production means the economy declines faster, so that there is a temporary paradoxical "surplus" of oil, and the price goes down while the economy goes down. A very strange analysis but I haven't had anybody reply, affirm, or rebut this seemingly twisted explanation.

In reply to by Sid Davis

Stormtrooper Mon, 07/24/2017 - 18:35 Permalink

Add another $57 billion to the $2 trillion+ in student loans and auto loans as well as 100's of billions in commercial real estate guaranteed by Fannie Mae that the taxpayer is going to have to shoulder soon.  Oh, well.  It's to save the banks.

GodHelpAmerica (not verified) Mon, 07/24/2017 - 18:38 Permalink

Oil is going to soar before year end because A.) no one thinks it will and B.) shale (over the long term) is much weaker than the world is appreciating .

803Mastiff Mon, 07/24/2017 - 18:58 Permalink

Talked to a Texas University geophysicist and oil well Doctor that had a name for it "Stranded Assets". It takes more energy to extract the oil than is recovered. Its like eating celery.N orth Dakota is a "Pension Ponzi Scheme" targeting Pensions chasing shiny yield.

squid Mon, 07/24/2017 - 19:35 Permalink

Once again, this can all be solved but getting the jackass government out of the way.This time being the treasury and its minion the FED.Get the interst rate back up to 5% and shale disappears.Cancel all student loan programs and all the Post modernists disappear.....(who in the hell would lend anyone money to get a degree in lezbian dance theory or Black studies?). Just get the fuck out of the way and allow the market to flush itself out.Sheeeese... Squid

ds Tue, 07/25/2017 - 01:12 Permalink

An oil independent US depends on Govt subsidies. US Govt subsidies now mean bailing out the leveraged zombies. Much better to have instabilities in ME and a collapsed cartel (OPEC) so that all oil producers are price takers. The oil shale industry deserves it, they may stand a chance to be limping along as zombies if they support Trump. Are they in business or champions of left wing ideologies ? Investments for risk adjusted returns do not mix with ideologies. 

Sapere aude Tue, 07/25/2017 - 17:28 Permalink

Sid. Posters may hate Peak Oil FACT but that is their tough luck.This strange idea that Peak Oil was disproved is not borne out by the facts. Peak Oil was based on CONVENTIONAL OIL and it was correct. In fact that peak came sooner than predicted, only propped up by Enhanced Oil Recovery, Shale Oil, Tar Sands, Sour Oil, Offshore oil and drilling in some of the most inhospitable places on the planet.What the disgrace is that the U.S. has known about out since 2010, as the concerns were made clear in the JOE2010, where the military was so concerned at not even having enough hydrocarbons to either protect the U.S. or keep the U.S. military going wherever it was.That is why the U.S. suddenly changed its tune on 'global warming' and why NASA even changed its data to make it look worse.That is why Elon Musk has received so many billions of dollars subsidy and why the concerted media attacks on oil and gas....because its running out.They've taken supplies from the SPR to treat as production, theyve used the media circus in every way possible to pretend there is a glut...and ironically how stupid do people have to be when inventory deliberately increased is then used as a way of cutting the price of oil, when the answer if you dont want it, to buy more of it!But of course the inventory figures were inaccurate too, just like the resource figures for shale, where the Monterey was downgraded 800% and the same will happen on the others becuase Red Queen Syndrome makes it physically impossible to keep raising production on shale, and the legacy is going to be thousands of wells that are not viable left pumping risible amounts of oil, left unmaintained and contaminating everything around them, as companies go bust before paying billions of dollars to properly plug and abandon wells.This has all been bankrolled by the Fed in the guise of QE, because the Fed have been buying up the Big Oil bonds, and just printing more dollars to match, so if the bonds go bust, so what!Remember "The Inconvenient Truth" Well the inconvenience about it was that none of the predictions came to be!!Now you see concerted attacks on diesel, but how many mention the recent report that just the 100Kw battery on a Tesla  is equivalent to driving a diesel for 8.2years!Of course the West didnt want panic buying, but now we all realise, or should that the Emperor was not wearing clothes!!Another smoke and mirror fake news of oil gluts, aided and abetted by Saudi and friends, none of whom EVER produced audited figures on oil production or exports, and its why the US has started to use a similar tactic of suggesting it 'exporting' so much oil, as both Saudi and the U.S. can manufacturer whatever stats they want, to try to prevent others from knowing there is no oil glut, to allow the U.S. and others in the west to keep buying cut price oil and rush for renewables out of necessity, but where they are loathe to say that in case of $200 oil.      

Sapere aude Tue, 07/25/2017 - 17:38 Permalink

Hubbs and Co. You are clearly not reading facts. There is demand, oil cannot keep up with demands, and that's even with the 4,000,000bbls shale a day added, and the Tar sands, and the sour oil and the offshore oil, and the Enhanced Recovery techniques.Go to Egypt and see them queueing up for five hours to fill up.Go to Iraq, see the same thing.Why do you think Obama had a deal with Iraq....oil, and even then not much of it, as the ME are the most mature oil fields in the world. The Super Giant Oilfields are no more, and we put it on a front page if there is a billion barrel prospective oil find....where its likely only 30% of that is recoverable, so 330,000bbls, which in all likelihood will take 10 years to recover, or produce maximum 10,000bbls a day, when we will be using 98,000,000bbls a day, and that's with all the renewables that are in use making no real effect on oil demand, with half the world not even having 24 hour power, or 24 hour water supplies, or healthcare, let alone the consumables we all have and where they want the same....all produced with OIL.How much fertilizer do you get from renewables, how much plastics, how much pharmaceuticals, how much paints and building products...The irony too is that reports on how damaging carbon dioxide is, are front page, yet the Swedish report that showed that this carbon dioxide made it easier to feed the world, and was a distinct advantage, but where in any event, we have come a long way since the industrial revolution when carbon dioxide being pumped out from coal fired furnaces and generators were a far cry from today.Always amazing too that the people paid to keep GLobal Warming alive, don't recognise their conflict of interest, and yet dont mention how much pollution wars cause!!How much oil will it require to rebuild Iraq, how much oil will it take to rebuild Syria, Yemen, Libya and all the other places that require rebuilding, and how much oil will it require to make all these extra EV's and solar panels....where like now their energy produced is just absorbed into the system, but the inexorable rise in demand for oil will continue, becuase its more efficient with an ultra high energy output per gm.