Six months after the oil-price slump ($100 to $43 and today about $57) only five firms out of the hundreds in the US shale-drilling business have gone bankrupt.
The typical shale well costs just $10 million and can be producing within a matter of months. That means the industry can adapt fast. Since December shale firms have cut costs by 20-25%, according to Bob Brackett of Sanford C. Bernstein, a research firm. This has been achieved by brutally squeezing the oil-services firms that provide them with rigs, pumps and staff—big services companies such as Halliburton have fallen into losses and small ones are on life support.
The shale producers have also cherry-picked which wells they drill, concentrating on the best prospects and fine-tuning their engineering methods. As a result the number of rigs active in America has dropped by half since the start of the year.
All firms have slashed their capital-investment budgets for 2015—a reduction of a third is planned in aggregate.
Listed E and P firms owe $235 billion and during the first quarter debt rose, reflecting continued heavy spending. Assume a firm is in trouble if its net debt is more than eight times its annual cashflow from operations (based on the annualised first-quarter figures and excluding the benefit from derivatives). On the basis of this snapshot, 29 of the 62 firms are distressed, owing a total of $84 billion. Listed shale firms with distressed balance-sheets account for 1.1 million barrels a day of oil production, or 1.2% of global oil production.
NOTE- If the firms go bankrupt then their land (and reserves) will get sold to other firms at lower prices. The companies may not live but the US shale industry will.
Based on the first quarter (excluding derivative gains), their overall annualised return on capital was 8%, before any taxes or any capital investment. After deducting a rough guess at the capital investment required to keep production flat in the short term, returns on the historic capital invested fall to zero. Some 55 of the 62 firms, accounting for 4% of global oil production, are making inadequate returns, by our reckoning.
Most shale firms say that by being thriftier and more selective they can earn annualised returns of 25% or more on new wells at $60-a-barrel oil. Reinforcing their optimism, there is a buoyant secondary market for new wells once they are producing, with pension funds and tax-free investment vehicles the buyers. An E&P firm active in the Eagle Ford basin, in Texas, says it can sell newly drilled wells for 1.4 times their cost. Sceptics grumble that they have heard it all before.
Oil capacity is being cut elsewhere, particularly in projects with high production costs, from deepwater drilling in places like the Arctic or Canada’s oil sands. Of the worldwide investment cuts by listed energy firms expected to happen by 2016, only about half are forecast to come from shale, according to Oswald Clint, also of Bernstein.