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Cartoon Of the Year

Every barrel of shale oil produced today by a US company, and not replaced, is slow, painful liquidation... as in putting a sign of the front of the main office that says, Going Out Of Business. The number of horizontal rigs still running in America's shale oil basins is not even coming close to reserve replacement. The decline of shale oil wells is simply too steep.

For a company not replacing reserves its long term debt, nevertheless, stays the same and the interest on that debt never stops. Every remaining barrel of oil in a company's reserve inventory then carries a bigger burden of that debt and interest. Those remaining barrels also carry a bigger burden on other extraction costs, like corporate overhead, marketing product, the cost and ability to hedge, even lift costs. In other words, true "breakeven" costs keep going up and up, while assets are going down and down. The longer this goes on, the worse it gets.

2020 Impairments

Along with the depletion of assets, if the price of the product the company sells goes down the law (SEC) requires impairments, or the writing down of reserves. That's a double whammy and one morning the company finds the value of all of its assets no longer covers its liabilities. The company's credit-worthiness dwindles; its reserve base revolvers get whacked and nobody wants to loan the company money anymore to replace reserve assets to stay in business. As assets disappear, cash flow declines and it becomes harder to make interest payments. Service providers and suppliers get shoved under the bus; they stop being willing to work on 120 payment terms.

What's to do? Selling non-core assets at a tremendous loss simply buys time and is additional "liquidation." Refinancing debt costs more money, and higher interest rates, and kicks the debt can down the road. The company tries to reduce overhead and starts sending people home, out of work. CEO's whine for government intervention, or help, and they demand their Board of Directors begin scheming for exit bonuses that will leave them financially secure when shit hits the fan. Filing bankruptcy in America is not a big deal anymore; its a great way to reduce debt for lots of people. Much higher oil prices is the only hope but everyone else in the sector keeps drilling wells, on credit also, adding more supply to an over supplied world market. Prices go lower. Demand for hydrocarbons is waning and well, things pretty much suck all the way around.

Then as if things weren't bad enough, along comes a new political administration in the US that is set to raise taxes and eliminate cost depletion and intangible drilling deductions from revenue for all shale oil companies. The EPA will re-appear with a vengeance and regulatory compliance costs are set to go sky high.

As they might say in Aberdeen, the US shale oil thing is now fooked. That's why everybody in it is squawking about consolidations and mergers. They want out, fast, as in... we'll give it to you, like Parsley just did to Pioneer, or WPX and Devon. The "premiums" on those deals were nothing. Often its a good idea to cut your losses and run.

The anti, anti-frac'ing rhetoric that popped up during the recent presidential campaign, Come and Take It actually meant please, come and take my company, Chevron, or Exxon, or whomever... take our debt and it's yours.

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