About 30% of US shale operators are technically insolvent at $35-a-barrel oil prices, according to a study released Monday by Deloitte. That means the discounted future value of these frackers is lower than their total debt.
“Beneath this phenomenal growth, the reality is that the shale boom peaked without making money for the industry,” the report said.
Outside of the companies that are technically insolvent, 20% of US shale oil operators are financially “stressed” at $35 oil, Deloitte found.
Frackers have burned through $300 billion
Aided by historically-low interest rates, US shale oil companies long enjoyed easy access to capital from investors captivated by their growth potential. These investments enabled technological innovations that sent production skyrocketing and made frackers more efficient.
Yet earnings and free cash flow proved elusive. The US shale industry burned through $300 billion since 2010, according to Deloitte.
The ongoing recession and subdued energy prices are now forcing large and small oil companies to slash the value of their once-lucrative portfolios.
Those writedowns from Big Oil could just be the beginning. Deloitte says that the shale industry also will be forced to write down the value of their assets by as much as $300 billion, according to Deloitte.
And while these asset impairments don’t directly impact a company’s cash levels, they do worsen already-precarious leverage metrics. That’s because writedowns don’t wipe out the debt accumulated to develop drilling projects.
Fracking trailblazer could go bankrupt next
With the coming wave of writedowns, the US shale industry’s leverage ratio could spike to 54% from 40%, according Deloitte, potentially triggering “many negative sequences of events, including bankruptcy.”
Already this year, 18 oil-and-gas companies have defaulted on their debt, compared to 20 for all of last year, according to S&P Global Ratings.
The financial stress could set off a series of last-minute mergers by oil companies unable to pay or refinance their debt.
Deloitte warns that just 27% of major exploration & production companies are truly “attractive” acquisition targets. “Being ‘adventurous’ in today’s uncertain environment could be fatal,” the report said, adding that half of the drilling companies are risky bets.
“The key question is what to buy and, more importantly, what not to buy,” Deloitte wrote.
Fossil fuels starving for cash
It won’t get any easier for the US shale industry to attract capital.
At the same time, there remains great uncertainty about how quickly the world economy will bounce back from the deep recession.
Given the rise of remote working and drop in air travel, it could take considerable time for oil demand to return to pre-crisis levels — if it ever does.