In early 2018 when major financial publications like the Wall Street Journal were predicting a bright and profitable future for the fracking industry, DeSmog began a series detailing the failing business model of fracking shale deposits for oil and gas inĀ America.
Over a year later, the fracking industry is having to reckon with many of the issues DeSmog highlighted, in addition to one new issue ā investors are finally giving up on theĀ industry.
Billionaire oil CEOĀ Harold Hamm ā who has been touted as a āShale Kingā ā made comments this week reflecting how weak investment interest is in oil and gas fracking,Ā going so far as to say that it wasnāt worth being a publicly traded company.Ā āIn todayās market, we donāt see a lot of value in it,ā he said on his company’s earnings call.
A similar sentiment has appearedĀ inĀ The Financial Post, which this weekĀ reportedĀ how āunlovedā by investors the Canadian tar sands industry ā which DeSmog also has highlighted as a financial disaster āĀ currentlyĀ is.
āGeneral investors are saying, āTo heck with energy,āāĀ Jennifer Rowland, an oil and gas analyst for Edward Jones, toldĀ The FinancialĀ Post.
After years of patience as the fracking and tar sands industries continuedĀ to pile up losses, investors are understandablyĀ tired of losingĀ money.
$XOP, the key ETF for #oil and #gas producers, is at its lowest point since inception, in 2006. Lower than the depts of the great recession. Lower than after the price crash of 2014-2016. #Shale is literally eating this sector alive. pic.twitter.com/xrfM6w3mAB
ā Clark Williams-Derry (@ClarkWDerry) August 7, 2019
2019 Quickly Becoming Another Financial Disaster of aĀ Year
2019 was supposed to be the year that shale oil and gas producers finally reined in spending, with the goal of funding all new development from free cash flow. And just like every other year, it didnāt take long for those plans toĀ unravel.
An analysis of 40 U.S. shale oil companies by Rystad Energy, an independent research organization in Norway, revealed how badly things had gone in the first quarter of 2019: āThe gap between capex [capital expenditures] and CFOĀ [cash flow from operating activities] has reached a staggering $4.7 billion. This implies tremendous overspend, the likes of which have not been seen since the third quarter ofĀ 2017.ā
In other words, the capital expenditures, orĀ money spent drilling oil, outpaced theĀ cash flow from operating activities, or the money made by selling oil, by nearly $5 billion, in the first quarter of 2019Ā alone.Ā
And the announcement of second quarter results brought no better news, with many shale companies sufferingĀ major drops inĀ value.
A very bad day for two tight oil companies.#OOTT #oilandgas #oil #WTI #CrudeOil #fintwit #OPEC pic.twitter.com/5eqq0KLbix
ā Art Berman (@aeberman12) August 2, 2019
New Dire Warnings About PeakĀ Shale
Undeniably, the so-called āshale revolutionā hasĀ produced record amounts of oil, with steady growth over the past decade. The dual techniques of horizontal drilling andĀ hydraulic fracturing, or fracking,Ā are very effective at producing large amounts of oil and gas, but that production has resulted in chronicĀ industry overspending by approximately a quarter trillion dollars over the lastĀ decade.*
Investors have been told to wait for the industry toĀ figure out how to produce the oil and make a profit, but a newĀ problem looms that could complicate those plans: Shale companies are running out of the āgood rockā that produces plenty ofĀ oil.
In the past, shale producer Pioneer Natural Resources has been criticized for its overly optimistic forecasts for increased oil production, but company CEO Scott Sheffield has been singing a different tune lately. Sheffield now is warning that most of the oil from so-called āsweet spots,ā or ātier 1 acreage,ā has already beenĀ extracted.Ā Ā
āTier 1 acreage is being exhausted at a very quick rate,ā SheffieldĀ told analysts on a call about second quarter results.
A similar warning is found at oil and gas industry news siteĀ Rigzone.com under the headline,Ā āIs the US Shale Boom Winding Down?āĀ
āNew well flows are not what they used to be, since wells are drilled further away from sweet spots or placed too close to each other in order to make the most of all that very expensive acreage,ā notes theĀ story.
And financial industry siteĀ Seeking AlphaĀ recently echoed all of these concerns, including the āgrowing scarcity of tier 1Ā acreage.ā
PERMIAN WATCH: Americaās Hottest Shale Play Is Slowing Down – Bloomberg https://t.co/aKfpnlxV2l pic.twitter.com/qvI2mZIMjl
ā GPPOil_Gas (@GPPOil_Gas) August 5, 2019
The messages coming from energy analysts, the financialĀ industry, and the fracking industry all lead to the same conclusion: The U.S. shale industry has been a financial disaster for investors, with producers piling up huge amounts of debt despiteĀ extracting copious volumes of oil from disappearing sweet spots. Now, shale companies are under mounting pressureĀ to pay back that debt by producing oil from lower tier acreage. If past performance is any indication, this approach is a major longĀ shot.Ā
General investors are finally catching up to the bad deal that fracking represents, butĀ the question is: What took them soĀ long?
Main image: Twilight of the Petroleum Age?Ā Credit: J.N. Stuart, CC BY–NC–ND 2.0
*Updated 8/9/19: This story has been updated to correct the overspending of the fracking industry to a quarter trillion dollars, notĀ billion.Ā
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