Speculative capital and water growing scarce for fracking plays as the "boom" in domestic oil production busts on low oil prices.-- blj
As Oil Plunges Further, Why It Might Be 'Game Over' For The Fracking Boom
The price of oil fell some more on Tuesday, down as low as $75.84 before closing at $77 a barrel. The decline is blamed on Saudi Arabia cutting prices rather than cutting output amid signs of global glut. That’s discouraging to America’s highly leveraged drillers, who had been hoping beyond hope that $80 would act as a floor on prices.
If prices don’t recover soon this could be the beginning of the end of the Great American oil fracking boom. Already ConocoPhillips COP +1.73%and Shell have announced a pull back in onshore investment. But the real pain will be felt by the army of smaller independent producers.
There’s been a lot of talk about the breakeven prices per barrel needed to sustain drilling in various oil plays. Some say $80, others say $70. If you have acreage in a sweet spot you might be safe down to $50.
But let’s get real — breakeven just isn’t good enough. Investors need returns on capital, not just returns of capital. And for myriad small drillers this fall in prices has virtually eliminated any possibility of turning real cash profits. Over the long run, a company that can’t generate a profit is worthless.
Though oil prices are down “just” 30%, shares in some drillers with shaky balance sheets have plunged 60%. It is always the case that shares in leveraged commodity producers are more volatile than the underlying commodity. Equities are ultimately priced on a company’s ability to generate profit. Small moves in commodity prices have a huge impact on earnings.
At $100 a barrel, the average oil company can generate net income on the order of $15 a barrel. But if prices fall 10% to $90, leaving a margin of $5, that means profits plunge 66%. At current prices, the average oil company isn’t profitable at all, and the weaker ones, loaded up with debt, are the walking dead. A perfect example is Goodrich Petroleum GDP +4.39%, which announced some big new discoveries in the Tuscaloosa Marine Shale. While the oil may be there, “the play is not economic at current oil prices,” wrote Cowen & Co. analyst Christopher Walling yesterday, adding that “liquidity is a growing concern.” Goodrich shares are down 70% in six months.
The oil industry is a study in contrasts. When you look at the financial statements of Exxon Mobil XOM +0.41%, you see a fortress — the company generates more than enough cash to pay all its capital spending and still have $20 billion a year left over for dividends and buybacks. Exxon will survive the downdraft just fine — its shares are down just 7% this year.
Contrast that with the small shale-only drillers, which have been borrowing like crazy to acquire acreage and deploy fleets of rigs. They may post net income every quarter, but their profitability is only an accounting illusion. Their capex has outstripped cashflow generation year in and year out. Without big borrowing (backed by rosy forecasts of future production growth) they are toast.
So who’s in the worst shape? The companies with a combination of high debt, high costs and relatively poor acreage, like Goodrich. Another early casualty could be Swift Energy, which has piled up $1.2 billion in debt in recent years to drill high-cost wells on marginal acreage. Swift’s investors are clamoring for change as shares have plunged 50% this year. Swift’s net debt has climbed to more than 3 times estimated 2014 EBITDA, or more than 80% of enterprise value.
According to data from U.S. Capital Advisors, other operators with high leverage that are living well outside their means include SandRidge, which has debt of 2.6 times EBITDA and 51% of enterprise value; EXCO Resources XCO +4.5% with debt 4.3 times EBITDA and 83% of enterprise value; andMagnum Hunter Resources MHR +0.6%, with debt 4.8 times EBITDA and 38% of enterprise value.
Contrast that, for example, with the fortress balance sheet of Occidental Petroleum OXY +1.38%, which has net debt of just .3 times EBITDA, a mere 9% of enterprise value.
Investors smell the weakness; year to date SandRidge is down 42%, EXCO down 46% and Magnum Hunter off 43%.
According to recent analysis by Credit Suisse, if oil prices fell and stayed $70 a barrel, Swift, Magnum Hunter and SandRidge would all see their net debt to EBITDA multiples rise to thoroughly unsustainable levels of more than 6x.
Why do these multiples matter? Lenders like to see ample cashflow available to cover debt payments. It’s common for bond covenants to require companies to maintain a debt-to-EBITDA ratio of no more than 4x. Get more leveraged than that and lenders will pressure companies to slash spending, stop drilling and sell assets — or entire operations.
Tight oil wells can come on strong at first, often 1,000 barrels per day or better. But the flows decline very rapidly, often dropping by 50% in the first 90 days. Thus any widespread cut back in drilling will have a pretty abrupt impact on overall U.S. oil output. “There’s no understanding that 3.5 million barrels per day of oil could be gone in 3.5 years without continuous drilling,” says Edward Hirs, a lecturer in energy economics at the University of Houston.
So why is it more likely that we’ll see a wave of consolidation in the oilpatch this time around, when it didn’t happen back in 2009, when prices plunged from $147 to $35 a barrel? Because back then companies hadn’t gotten used to high prices and hadn’t yet begun to remake themselves wholly as onshore shale drillers. Their reserves were still structured for a world of sub-$50 oil. This time it is most assuredly different.
Another word on those “breakeven” prices. In recent weeks we’ve seen lots of stories presuming to tally the breakeven oil prices that various OPEC states need in order to balance their budgets and keep their people placated with social programs. Ignore all of them, because those numbers are based on data at least several months old.
What’s changed since then? The foreign exchange value of the U.S. dollar. Russia’s ruble has plunged20% against the dollar this year to record lows. The Saudi riyal, ostensibly pegged to the dollar, still managed to “tumble” last week. Even the Canadian dollar has slumped against the greenback.
This matters a lot. Oil trades in dollars, but the government budgets of oil exporters are denominated in their national currencies. So as the dollar strengthens, these countries, upon conversion, are left with considerably more riyals and rubles than a year ago. Even at a lower dollar-denominated oil price, their purchasing power per barrel sold hasn’t changed much at all. What’s more, with the Federal Reserve calling an end to quantitative easing, the dollar will only keep getting stronger. Thus the pain to OPEC from lower prices is minor; the pain to America’s marginal drillers will be severe.
Lest we be too pessimistic, it’s worth giving the final word to an optimist. “A 6-month decline in oil prices will not cause any producers to actually go bankrupt,” says Brian Bradshaw, a principal with BPCapital’s TwinLine mutual fund. “A lot of pain has already been felt. If you want to know the most likely bankruptcy candidate I think it is the entire country of Venezuela.”
So maybe the fate of America’s small drillers won’t seem so bad after all.
Oil Erases $8.4 Billion for Junk Traders After Debt Binge
By Lisa Abramowicz November 04, 2014
As oil prices plunge, so goes the value of high-yield bonds.
Traders are dumping dollar-denominated notes of speculative-grade energy companies today as oil reaches a three-year low: Petroleos de Venezuela SA bonds fell more than 4 percent and some Halcon Resources Corp. (HK:US) notes have lost about 6.5 percent.
The moves extend $8.4 billion of losses for junk-rated energy-company bonds that have accumulated since the end of August, Bank of America Merrill Lynch index data show.
Oil prices are driving credit markets -- where energy companies account for a record proportion of speculative-grade bonds -- as investors consider the possibility of both deflation and less income for commodity-dependent nations such as Venezuela.
The concerns are pushing traders toward safe-haven assets, such as U.S. Treasuries, and away from riskier debt, with energy companies being the hardest hit.
“An oil slick hit bond yields yesterday afternoon,” Jim Vogel, a fixed-income strategist at FTN Financial in Memphis, Tennessee, wrote in a note today. While some investors rely on economic data for cues about whether to buy or sell, “oil has the upper hand for now.”
Saudi Arabia is cutting prices, the U.S. is pumping at the fastest pace in more than three decades and global growth is slowing. That’s a bad mix for oil, causing West Texas Intermediate crude to slide 2.8 percent to $76.58 a barrel at 11:14 a.m. in New York. It earlier traded as low as $75.84.
The debate is whether falling oil prices are good for economic growth or not, because it makes stuff like gas cheaper for consumers to buy. That would give households more spending power elsewhere.
So far, traders are voting it’s a bad thing for the U.S. outlook. Yields (USGG10YR) on 10-year Treasuries, a benchmark for everything from mortgages to corporate debt, have fallen to 2.31 percent from 2.62 percent on Sept. 17.
Declining energy prices may be more negative for markets than positive this time around, at least in the short term, for a couple of reasons. Companies and nations that rely on oil have sold an unprecedented amount of debt. The lower prices go, the more likely these borrowers will struggle to repay their obligations.Junk Bonds
And the credit markets are tied to their fortunes more than ever before. Debt of energy companies now account for 15.5 percent of Bank of America Merrill Lynch’s U.S. High Yield Index, up from 9.74 percent at the end of 2007. The volume of debt in the energy index has swollen by $37 billion just this year alone.
State-run Petroleos de Venezuela’s $5 billion of 6 percent notes due in 2024 dropped 2 cents to 49 cents on the dollar as of 11:43 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Houston-based oil and gas company Halcon Resources $1.15 billion of 9.75 percent debt due in 2020 tumbled 6.5 cents to 78.5 cents. The rout has extended into non-energy borrowers, like telecommunications company Sprint Corp. and hospital operator HCA Holdings Inc., whose bonds have also fallen.
Dropping oil prices have dragged down benchmarks for the overall high-yield market. The share price of BlackRock Inc. (BLK:US)’s $14.2 billion junk-bondexchange-traded fund (HYG:US), the biggest of its kind, has fallen 0.44 percent this week.
“Is ‘cheap oil’ good or bad for the markets?” Peter Tchir, head of macro strategy at Brean Capital LLC, wrote in a note today. “I am not sure, although I lean to this being more of a negative to markets here than a boon, particularly in high yield.”
To contact the reporter on this story: Lisa Abramowicz in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Shannon D. Harrington at email@example.com Caroline Salas Gage, David Papadopoulos
California Voters Deal A Major Blow To Fracking
In a victory for proponents of clean energy, two out of three California counties voted to ban fracking Tuesday despite a lobbying campaign by oil and gas corporations for the opposite.
Voters in San Benito and Mendocino counties approved measures that prohibit the controversial practice, which involves injecting a high-pressure mixture of water, sand and chemicals into the ground in order to extract natural gas. Both counties lie on the Monterey Shale, a gigantic rock formation beneath the earth's surface that's estimated to contain more than 10 billion barrels of oil. Voters in Santa Barbara county, where oil and gas companies spent $5.7 million in support of fracking, defeated a similar initiative.
Members of the California state senate narrowly voted against a statewide fracking moratorium earlier this year, but Santa Cruz County and the city of Los Angelesalready have similar bans in place. A handful of local governments around the country, such as parts of New York and Colorado, have also enacted anti-fracking legislation.
Proponents of fracking in the Golden State argue that California, which is the third-highest crude oil producer in the country, would reduce its dependence on foreign energy sources while creating domestic jobs and generating revenue. They also claim evidence that the practice contaminates groundwater, a common refrain for environmentalists, has yet to emerge.
But advocates for fracking bans assert that toxins will inevitably make their way into the drinking water supply of a state that's been crippled by a drought for more than three years. They're quick to note that roughly a quarter of the chemicals used in the process are known carcinogens. Fracking, they say, will counteract California's other efforts to reduce pollution and discourage the implementation of renewable energy sources.
Timothy Krantz, a professor of environmental studies at the University of Redlands, analyzed a number of water wells located near existing fracking sites earlier this year. His research revealed a number of chemicals in the water supply, he explained in an interview with Think Progress, including "off the charts" levels of a carcinogen linked to leukemia and other forms of cancer.
Moreover, the process of fracking itself involves using a significant amount of water -- water that advocates argue the drought-plagued state can't afford to sacrifice.
California Gov. Jerry Brown (D) drew the ire of environmentalists last year when he announced his support for a bill that would allow fracking to continue while lawmakers implemented a specific set of regulations and experts studied its potentially hazardous effects.
Residents of Denton, Texas -- where fracking was invented -- made history Tuesdayby becoming the Lone Star State's first city to outlaw the practice. Other fracking bans failed to pass in parts of Texas and Ohio.
$100 Million in Taxpayer Subsidies to Big Oil Promotes Fracking in California
a time when California is literally on fire from a global warming drought, when the state is running out of water in several regions, as reported in theNew York Times: With Dry Taps and Toilets, California Drought Turns Desperate, the last thing we (I am a resident of the Golden State) need is for the oil industry to contaminate our limited fresh water with dozens of toxic chemicals to use for the development of thousands of new fracking wells that would defile and poison our beautiful landscape along the central coast of California.
That’s why organizers from Santa Barbara Water Guardians, Food & Water Watch, and San Luis Obispo Clean Water campaigned to establish an initiative to ban new fracking – Measure P - development starting from Santa Maria through Santa Barbara to Carpinteria for the November 4 ballot. Three weeks of hard work paid off. Three hundred volunteers and 20,000 signatures later—they successfully got the initiative off the ground.
To use a familiar analogy, fighting the most powerful and wealthiest industry in the world is the old David v. Goliath tale.
Oil companies have identified thousands upon thousands of potential fracking drill locations along our beautiful coastal region from Santa Maria to Carpinteria.
Millions of tourists visit the central coast of California because it’s one of the most gorgeous ocean landscapes in the world. Imagine California’s scenic shores cluttered with thousands of ugly methane-polluting fracking wells up and down the coast.
The production of fracking in a drought-stricken, fire-ravaged state would strike any rational person as insane. Many cities are requiring tough restrictions on water usage, and should residents go over the required limit, they’ll have to pay penalty charges.
Despite California’s drought crisis, fracking requires up to 2 million gallons of water a day. Imagine thousands of wells using millions of gallons of water. And that’s only the beginning.
After that—fracking involves a long list of dangerous and polluting "enhanced" extraction techniques, including constant releases of methane, a greenhouse gas emission that is heavily contributing to global warming conditions. In fact, scientists have determined that global warming is the primary reason why California is experiencing the worst drought in the state’s history.
According to a recent Reuters’ report, “California Drought Worsened by Climate Change, Scientists Say, the high-pressure ridge is obstinately parked over the Pacific Ocean for the past two winters. This ridge is blocking storms from hitting California, and stubborn ridges of this kind are much more likely to form from greenhouse gases.
As for the Goliath oil industry, the deck is heavily stacked, profits trump all other considerations, including taking what little water is left from California’s agricultural lands and contaminating millions of gallons of that valuable water with dozens of toxic chemicals for natural gas drilling, hydraulic fracturing, commonly known as “fracking.”
Frackinginvolves injecting water, sand and chemicals underground to break up rock and extract oil and gas. The practice has been halted or banned in 12 states due to water contamination issues, earthquakes and other problems. It also uses a method called “steam-injection,” a water-intensive process that involves steam-heating oil to 500 degrees to extract the gas from the ground.
California is experiencing heat-breaking temperature records for the last four years. But if the oil-frackers get their way, they will add 500 degrees of hot oil to the drought and rising temperatures. It is the most heat-intensive form of oil production and is linked to groundwater contamination. For instance, a recent spill in Cold Lake, Canada contaminated a lake and aquifer. In the Orcutt oil field near Santa Maria, there have been 94 unexpected oil "seeps." ¹
I’ve been writing about the fossil fuel industry’s reciprocal relationship with the US government for some time at BuzzFlash at Truthout, and it’s a never ending tale of horrors and disillusionment. So you would think by now that nothing would shock me. We know that the oil oligarchs place profits above our security, health, nature, animals, and now with the acceleration of global warming, we are facing the possibility of mass extinction if we continue to rely on polluting fossil fuels for energy.
But when all is said and done, ultimately, the US government is the culprit for passing some of the most evil laws conceivable that benefit the oil industry at our expense. Sadly, Governor Jerry “Big Oil” Brown, who was ahead of his time in the 1970s for his renewable energy and “less is more” philosophy, is now the biggest fracking salesman on the West coast.
California is home to one of the largest remaining deposits of oil in the country: the Monterey Shale. It has 13.7 billion barrels of oil locked underground and fossil fuel companies are spending millions trying to dig it up with hydraulic fracturing techniques. If they’re successful, this oil would be above and beyond what our best scientists say we already can’t afford to burn. Governor Brown’s latest actions make it clear he’s excited by the potential of the Monterey oil play and is paving the way for increased fracking across the state.² Both President Obama andHillary Clinton are also global frack-pushers.
That our elected officials arrange dirty oil deals behind closed doors is nothing new. But when I learned that Americans are paying for Big Oil’s multimillion dollar advertisement campaigns, such as the one on Measure P, it floored me.
In addition to royalties and billions of tax dollars for subsidies, we’re paying $100 million a year to the oil industry, compliments of the federal government, that is possibly helping to finance oil campaigns worth millions of dollars in media advertisements.
Thus when Californians see the perpetual gas industry’s “No on P” ads, they should know that they are likely flipping the bill for those multimillion dollar TV ads with public federal taxes.
As Jeanne Blackwell, representative of the San Luis Obispo’s Clean Water Action, explained, “Oil companies are given $100 million a year of taxpayer money to spend on these campaigns. Section 999 under the Energy Policy Act of 2005 created the Research Partnership to secure Energy for America (RPSEA). Section 999 creates an "Oil and Gas Lease Income" fund "from federal royalties, rents, and bonuses derived from Federal onshore and offshore oil and gas leases." The Feds put in $50 million to get the ball rolling.
As for the oil industry’s claim that fracking contributes to the community via taxes, that is not a tenable claim. Furthermore, the government has given the fossil fuel industry an exempt card on taxes. There are so many beneficial tax loopholes that at the end of the day, Big Oil pays practically nothing in return. Instead, tax payers give the oil industry billions of dollars; an industry that makes a trillion dollars a year in profits. So if you’re wondering why there is no federal funding for schools, Medicare, VA hospitals and food stamps, think Big Oil and wars because that’s where most of your tax dollars are going.
As you can imagine, there is little public funding to support TV, radio or press advertisements against the oil industry’s stacked deck. The oil ads have been running day and night, conveying misleading messages of fear that have nothing to do with fracking. For instance, the oil ads claim that the fire department would lack funding and that jobs would be lost if Measure P passed. Did it occur to the oil-frackers that if all the water is being used for fracking, there’ll be no water left for putting out forest fires and aiding communities that are caught in the flames of spreading wildfires?
Given the high Latino population in Santa Maria, the oil industry claims that Measure P is “racist” and that Latinos will lose jobs if Measure P passes. This is misleading because there are very few job opportunities in the oil industry for the reason that the machinery does most of the work. Jobs are often temporary; once the wells are operating, not much labor is required. Recent statistics have shown that the coal, oil, and natural gas industries require steadily fewer jobs as high-cost production equipment takes the place of human labor.
And yet despite the odds of having all the money and power in the world, the gas-frackers are running a tad scared. They know this ain’t good ol’ boy Texas. Californians are not easily duped by the oil industry’s phony ads. And that’s why the frackers are preparing to sue if Measure P passes.
On October 7, a meeting was held by the Santa Barbara Board of Supervisors to determine whether or not Measure P specifies that Santa Barbara County can establish a process for handling its exemptions. According to the Environmental Defense Center of Santa Barbara: “The Board voted to approve exemptions in a 3-2 vote, confirming that owners of existing oil operations won't have to take any action under Measure P and can continue to operate as always. Additionally, it was clarified that if a company wants to engage in new high-intensity oil production, the company may apply for an exemption from the ban authorized by Measure P. Thus, for example, oil companies may apply for an exemption from the measure if they claim the ban would unconstitutionally ‘take’ their property.”
Fracking has been documented in 10 California counties — Colusa, Glenn, Kern, Los Angeles, Monterey, Sacramento, Santa Barbara, Sutter, Kings and Ventura. Oil companies have also fracked offshore wells hundreds of times in the ocean near California’s coast, from Seal Beach to the Santa Barbara Channel.
In other words, exemptions under Measure P are intended to allow current oil production to continue and to protect the County from legal risk when implementing the measure, if passed. According to the Environmental Defense Center’s report, “Measure P only applies to new, high-intensity oil production operations. These operations would be banned because they use large amounts of water, often with toxic and carcinogenic chemicals; threaten our ground water, health, agriculture, tourism and property values; risk potentially triggering an earthquake along one of our major fault lines; and generate tons of greenhouse gas pollution, worsening climate change.”
The Board of Supervisors’ meeting was open to the public. Many Santa Barbara proponents of Measure P remember the horrific 1969 oil disaster and didn’t want to see further devastation due to voter-deceiving ‘No on P’ TV ads.
I was told by several Measure P proponents that the oil industry allegedly recruited students and paid them and others to attend the meeting in order to oppose Measure P.
Jeanne Blackwell, exasperated by the dirty tactics used by the oil industry, remarked, “The oil companies were there in force of course. They had hired local students to attend, they gave them green tee shirts to wear, and took directions from a ring leader who told them when to raise their hands and signs, ‘No on P’. It was quite the show. A farce really.”
I had to laugh at the “green shirts”. Just like BP’s ridiculous logo of green and yellow, as if it were a solar company, once again the oil deceivers try to appear as “green energy” companies.
When we have the capability to produce clean, affordable, renewable energy from solar and wind in the sunshine state, it makes no sense to pollute California’s valuable and limited water for fracking during the worst drought in history.
As Worldwatch Senior Researcher Michael Renner put it, "Renewable wind and solar companies are poised to tackle our energy crisis and create millions of new jobs worldwide."
We shall see if the oil industry’s multimillion dollar ads, paid for indirectly by the taxpayers, will succeed in persuading the voters—or—are central coast residents smart enough to see through the oil industry’s misleading media campaign?