Leading independent oil analyst Amrita Sen confirms US shale oil industry never made money:
>>>posted by coolreit at iV<<<
Amid heightened intra-day price volatility, as the battle between weak fundamentals and strong technicals intensifies, it was David Einhorn’s comments about the weakness in shale producers’ financials (albeit acknowledged by many already) that caught the market’s attention last week.
Indeed, aggregate free cash flow has not been positive since Q3 09. The oil price collapse meant cash flow from operations plummeted to $3.8 billion in Q1 15. So, even after a huge cutback in Capex to $9.2 billion, negative free cash flow worsened by $1.5 billion q/q at the end of Q1 15.
While this is not surprising, the number of bankruptcies has been lower than our expectations. This is because credit has not dried up yet, and producers have been raising capital through alternative techniques to shore up liquidity. These are expensive methods and often come at the expense of existing shareholders, but they decrease the risk of default for now.
In the year-to-date, high yield issuance is pegged at $15 billion (across E&P, mid-stream and downstream), which is more than 50% higher than the average raised in the same period over the previous five years. Companies have also raised $11 billion through equity.
The other lifeline for producers has been hedging. Given the price decline, many hedges are still deeply in the money. On average, total revenues during Q1 15 appear to have been propped up by around 17% by gains on derivatives, or a total of $1.7 billion.
Despite the dire financials, which will matter in the long run, for now, as long as the funding is there, production will continue. So, US production will fall sequentially, as legacy declines step up following the drastic cuts in rigs. But producers will get another run when the rigs return. |
