Cartoon Of the Month

The U.S. shale oil sector is deeply underwater on its long-term debt. Below $90, its true breakeven price, I have no clue where, or how, it is still borrowing money. But it is. It is borrowing money to pay dividends to shareholders. Google that if you must, then think about that.

Here's the real deal...at $62 WTI NYMEX, after all full cycle costs are paid, including taxes, royalty, G&A, interest expense on debt, dividend payments, and operating cost, it makes only $15-$18 per BO profit.

You need to take that number and see how many barrels of oil is required to payback an $11 MM well, first. You won't believe it; and less than 3% of Permian Basin wells, for instance, can make that amount of oil in their lifetime. Then take that same number again, that $15 net back, and divide by $250 B of long-term debt, plugging and decommissioning costs in just the Permian Basin alone. It doesn't work.

I am sorry to say, the American shale oil sector is in deep doo-doo. In the Permian Basin for instance, it does not have the assets (proven developed producing reserves) at $62 to pay those loans back and cover the cost of plugging 55,ooo wells and cleaning up its mess. Other American shale oil basins are in worse financial condition.

The cartoon is another great Etta Hulme cartoon from 1986, the end of the great Austin Chalk boom in Texas that at one time had over 3,000 rigs running in it. Banks, big banks, loaned money to the boom and then collapsed, failed, and many people suffered. Google that if you must. It was awful.

Nothing is different about this shale boom, not in the Permian. Unless oil prices go up $30 a barrel, and stay there, this boom will also be a financial bust.