Since the start of the year, 57 oil production and oilfield services companies have filed for Chapter 11 bankruptcy protection. Many more bankruptcies are on the way, all in the shale patch. And there does not seem to be even a shred of light at the end of this tunnel.
The U.S. shale patch was the pride and joy of the nation’s energy industry. Rightly called a shale revolution, the boom in oil and gas production fueled by hydraulic fracturing turned the United States into the world’s largest oil and gas producer. But this had a cost—a cost that is now being paid with a flurry of bankruptcies.
Rystad Energy said last month it expected another 150 U.S. shale oil companies would file for Chapter 11 protection by the end of the year unless prices rise above $50 a barrel. Others have suggested we might see consolidation, the way the industry consolidates during every crisis, but this time around, that seems unlikely.
When earlier this year, Chevron (NYSE:CVX) snapped up Noble Energy (NASDAQ:NBL) in a $5-billion deal, there was the usual talk that this could be the start of a wave of mergers and acquisitions for which the oil industry was ripe: assets were cheap, many asset owners were struggling, and those with the money could expand their asset base at bargain prices. Only it seems this time no one has the money.
Reuters’ Jessica Resnick-Ault, Dmitry Zhdannikov and David Gaffen called it the legacy of the U.S. shale revolution in a recent analysis. Shale drillers grew too much too fast, failing to make any money on the way. After investors got burned not once but twice, few want their business.
The last oil price crisis, the one that did spark a consolidation wave after 2014, was a typical one. Prices dropped, some companies failed, others were bought up by bigger ones, prices rebounded, and production growth was back on track. Investors, however, began to insist on returns instead of growth. Producers were trying to get there when this year’s crisis hit. It is no surprise that potential buyers are wary.
Debt is a major turn-off. Shale drillers took on debt the way squirrels store nuts for winter. Shale oil production is a capital-intensive business, but this aspect of it was for a long time overshadowed by the fact that oil starts flowing a lot more quickly from a fracked shale well than a conventional one. So drillers took on debt and boosted production to repay this debt. It became a vicious circle that the last crisis may have well put a stop to.
Banks became reluctant to extend shale oil drillers’ credit lines even before the Saudis turned the taps on and Covid-19 spread across the world. New wells were not yielding as much as borrowers had said they would, and debt piles were growing. Then the pandemic came, and drillers started falling under the twin weight of billions in debt and $20 oil.
Again, these falls mean there is cheap acreage for sale, and some of it may well be excellent acreage. But there is one more reason in addition to general wariness why there are few buyers: the industry does not seem to believe that there will be a third shale revolution.
The last crisis sparked a shift in priorities, Argus Media’s Tom Fowler reported recently. Growth at all costs is no longer priority number one. Smart growth is, which means sucking out every last barrel of oil from a well before buying more acreage to drill more wells.
What is more, investors have not stopped insisting on getting higher returns rather than higher production, and companies have been listening. With a focus on fully developing their already existing assets and pressure from investors to boost returns, asset-buying appetite is very likely to remain low for a while. It could be a long while unless oil prices soar in the near future.