May 31, 2019 Read More →

Analysis shows U.S. shale drillers still not profitable

OilPrice.com:

Despite the hype of lower breakeven prices, and despite the hype around longer laterals, energy digitalization, and other technological breakthroughs, most shale companies are still not profitable.

In fact, roughly 9 out of every 10 U.S. shale companies are burning cash, according to Rystad Energy. The Oslo-based consultancy studied 40 U.S. shale companies and found that only 4 of them had positive cash flow in the first quarter of 2019. In fact, the number of companies with positive cash flow was lower than it was previously, and total cash flow from the group fell from $14 billion in the fourth quarter to just $9.9 billion in the first.

“The gap between capex and [cash flow from operating activities] has reached a staggering $4.7 billion. This implies tremendous overspend, the likes of which have not been seen since the third quarter of 2017,” Alisa Lukash, Senior Analyst on Rystad Energy’s North American Shale team, said in a press release.

U.S. shale drillers have historically loaded up on debt in order to continue to finance their cash burn. But investors have soured on the sector, finally waking up to the fact that shale drillers by and large are money losers. According to Rystad, no shale company has made a public offering since the collapse of oil prices last year, the longest stretch of time with no public capital issuance since 2014. “Recently released data, which confirmed dismal first quarter earnings, only served to cement negative market sentiment,” Lukash said. Investors are fed up and are “leaving no room for undisciplined spending in 2019.”

Smaller shale companies are in a particularly tough position. Even as investors demand capital discipline and an end to reckless spending, small drillers are unable to sit still because of the treadmill of declining shale wells. Rapid declines in output require constant drilling, which, if you are an unprofitable company, requires constant reinjections of capital. For years, that was not too much of problem as long as Wall Street kept the taps open.

However, financing is becoming less abundant as tightfisted investors become more demanding. Instead, in order to survive, small shale companies are under pressure to either grow their way out of the problem or find a buyer, Robert Kaplan, president of the Federal Reserve Bank of Dallas said in an interview with the FT.

More: Shale drillers keep on falling into the same trap

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