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Debate Rages Over Global Oil Demand

Debate Rages Over Global Oil Demand

Easing inflation has boosted bullish…

Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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2020: The Year Of The Oil Bankruptcies

Oil Bankruptcies

A bankruptcy boom has hit the oil and gas industry, and it’s just getting started. Investors have lost their appetite for shale, and energy debt has become among the least desirable in the market. 

The industry has been teetering on the verge of mass hysteria for much of 2019 as a record number of energy companies folded.  

According to Energy and Restructuring law firm Hayes and Boone’s, a grand total of 50 energy companies filed for bankruptcy during the first nine months of the year, including 33 oil and gas producers, 15 oilfield services companies and two midstream companies.

In contrast, 43 oil and gas companies filed for bankruptcy for the whole of 2018. 

The biggest oil and gas bankruptcy of the year--indeed, the biggest since 2016--was EP Energy, which filed for bankruptcy in October, unable to pay back some $5 billion in debt. 

Now, some observers are warning that the shakeout will pick up serious momentum in 2020. 

Bingeing on Debt

During the latest shale boom, the putative class valedictorian of the modern energy industry, American drillers binged on mountains of readily available debt as they capitalized on investors and financiers willing to gamble on the premise that fracking operations could be significantly cheaper and more efficient than conventional drillers.  Related: US Energy Secretary: The Shale Boom Is Far From Over

Before long, oil markets were flooded with a deluge of the commodity far outstripping demand. In what few could have foreseen, the US became the world’s largest oil producer, with its nearly 13 million b/d output turning it from a net importer to a net exporter of crude. Predictably, prices tanked by a sizable margin, dropping to levels well below the breakeven points of many drillers.

Suddenly, investors became wary of the shale industry and energy debt became anathema.

They have good reason to be scared. 

Companies with junk-rated bonds have been defaulting on interest payments at record levels, while dozens of smaller drillers that had saddled themselves with too much debt have been dropping like flies.

Now analysts see this taking an even sharper turn, with more mergers and more debt restructurings required to get the industry back in shape.

As Ken Monaghan, Amundi Pioneer co-director of high yield, has told CNBC:

We’re at the early stages [of the shakeout]. The problem is some of these companies still have a bit of rope to go. they don’t have [debt] maturities that are coming up in 2020 and 2021. They’re going to try to outrun the clock and hope that oil prices move higher.”

Michael Bradley, energy strategist with Tudor, Pickering, Holt, has expressed a similar sentiment, saying that the market is no longer rewarding energy companies with aggressive expansion schemes, preferring instead to see profits and money returned to shareholders.

“Most people are saying we don’t want you to spend money on growth. We want you to give the money back because you guys are dummies.”

Monaghan says there are more distressed companies in the energy sector than in any other, with energy bonds only recently moving to the green after remaining in losing territory for much of the year thanks to the latest oil price mini-rally.  Related: Iraq’s 550,000 Bpd Oil Deal Is In Jeopardy

Bradley estimates that about $30 billion- $40 billion of high-yield energy debt [bonds] is now at risk. These companies have little choice but to seek bankruptcy protection and restructure if they hope to live to see another oil boom.

Catch 22

Shale drillers face a catch 22 situation because of the very nature of their business. Young shale wells decline at notoriously fast clips, with many depleting 70 percent to 75 percent of their reserves in the first year, thus forcing shale drillers to continue drilling new wells to replace lost supply. But with a freeze-out in debt and oil prices still low, they are bound to find it increasingly hard to keep up production.


Bradley sees many mid-cap oil companies resorting to mergers in order to survive with an estimated $2B-$7B in M&A deals over the next two years. 

These won’t be the usual gilt-edged mergers with fat premiums, though, as the tie-up between WPX Energy and Felix Energy has proved. This was a smart and sober $2.5-billion tie-up that reflects the fact that investors have soured on the sector. 

In other words, the consolidation wave that everyone seems to expect is going to focus on smart deals, or none at all. 

This also means that large-cap independent players such as Concho Resources Inc. (NYSE:CXO) and Diamondback Energy Inc. (NASDAQ:FANG) are likely to see their market shares grow.

Ultimately, the ongoing shakeout is likely to leave the industry in a much better patch, though not so much for the consumer who will have to contend with higher oil prices thanks to higher levels of production discipline.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on December 28 2019 said:
    The title of your article is misleading since it gives the impression that you are talking about oil bankruptcies around the world when it is specifically about bankruptcies among the US shale oil industry.

    Baker Hughes oil rig count has been telling a story of a US shale oil industry facing a steep oil rig count decline, confirmed production slowdown, declining well productivity and investments, bankruptcies and eventual demise. 2019 was the year in which the hype around US shale oil production finally burst. The US shale oil industry will be no more in 5-10 years.

    You also made the mistake of claiming that the United States has become the world’s largest crude oil producer at 13 million barrels a day (mbd) turning it from a net importer to a net exporter of crude. You are absolutely wrong and I will explain to you why.

    And while the US Energy Information Administration (EIA) continues to claim that US oil production reached 12.8 mbd this year and is projected to hit 13.8 mbd in 2020, such a claim is self-delusional and a plain lie. The reason is that the EIA’s production figures are based on both estimation and hype. US production is over-stated by at least 2 mbd. This means that US oil production will at very best average this year 10.8 -11.0 mbd and around 10 mbd or less in 2020. Russia is the world’s largest crude oil producer at 11.23 mbd compared with 10.8 mbd for the US.

    Moreover the United States will never ever become a net crude oil exporter. There are two cardinal figures which determine how much crude oil the United States imports: Production and consumption.

    In 2019 the United States consumed 21.0 mbd based on demand growth from 2018 according to the authoritative 2019 OPEC Annual Statistical Bulletin and claims to have produced 12.8 mbd thus necessitating imports of 8.2 mbd.

    The EIA says that the US was a net petroleum products exporter to the tune of 3.2 mbd. It was also a net importer of crude oil to the tune of 5.2 mbd. Offsetting net product exports against net crude oil imports we come to a deficit of 2.0 mbd. This proves that the claim that the US became a net oil exporter is false.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Charles Kao on December 28 2019 said:
    Thanks for a good summary on Shale drilling past events and current fallout. Hope our financial system can fix oversupply pain equally efficient as shortage panic.
  • Lee James on December 29 2019 said:
    It's a fair question to ask where the oil industry goes from here. The industry is finally - finally - realistic about cost of production, and the false sense of security that high-volume production brings.

    Is the future to be found in shifting to alternative ways and places to extract oil? Or, is the whole energy scene changing such that "Energy" does not exclusively mean the kind of energy that we burn?

    I think we know what we need to do. There's no silver bullet; it's more likely silver buckshot that we need. Let's get headed down the road of clean energy, just as fast as we can.
  • Harry Flashman on December 30 2019 said:
    Why do people keep repeating the stupid lie that the US is a net oil exporter? IT IS NOT! The US uses about 18-20 million barrels a day and produces 12-13, to me, and I admit I'm not a maths genius, that mean it imports a minimum of 5 to a maximum of 8 million barrels a day. This is supposed to be a knowledgeable site, but keeps making this mistake. STOP IT!

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