In the last decade, the US has become the largest oil producer in the world due to fracking. However, are fracking companies actually making money?
Here is an article from The New American, which is about as far right as you can get without falling off the edge, about fracking.
As Oil and Gas Prices Drop, Frackers Declare Bankruptcy
Note: Fracking companies are basically paying credit card interest rate to borrow money.U.S. frackers haven’t turned a profit in 10 years, and investors have not only been putting pressure on them to show them a return on their investments, but have largely shut off the flow of new investment capital until they do. Last year oil companies raised about $22 billion from both equity and debt financing, less than half what they raised in 2017 and less than a third of what they raised just five years ago.
More than 170 small fracking companies weren’t able to survive and declared bankruptcy last year. Another eight small fracking companies have cratered so far this year. And if oil prices continue to slide — crude oil hit $66 a barrel less than two months ago but now trades at $54 a barrel — lack of investors’ funds will be the least of their worries. Survival will be their top priority. Those companies going bankrupt last year left investors holding the bag on nearly $100 billion, and new investors aren’t interested in repeating the experience.
So fracking companies, determined to expand their operations while making them more efficient in order to make them profitable, are using riskier and higher-cost strategies to keep them pumping. Some are selling off some of their assets, while others are considering new issues of bonds. But investors are likely to rate their bets as high risk, and will demand much higher interest rates to offset the perceived risk. Some estimates place the cost of new money at 13 percent a year, almost double what investors were willing to accept just a year ago.
Another strategy being used is a partnership between an investor and a company, called a drillco. The investor receives all the income from the wells he is funding until he has received all of his money back, plus 15 percent. The remaining income, if any, goes to the producer. The problem there is that new technology pushes most of the new production to the front, with production from a newly fracked well dropping precipitously within a year.
Lets take a look at two of these so called most stable companies.Profitability is elusive enough as it is. Rystad Energy, a Norwegian energy consultant, looked at 40 U.S. shale companies and learned that only four of them had positive cash flow in the first quarter of 2019.
Have anybody heard of EOG? It stands for Enron Oil and Gas. Yup. It is a spin off of that Enron. In 2017, the company reported a net income of $2.6 billion. The previous years? An average loss of $1.1 billion per year. That financial turnaround seems very impressive until you realize that $2.2 billion, or about 85 percent, of its 2017 income was the result of the new tax law. Without that gift from the GOP and Trump which allowed EOG to write off their losses in 2018, EOG would have lost approximately $700 million between those two years. Instead they are $1.5 billion ahead of the game. The company is still 6 billion in debt by the way.
Continental Resources is another of the shale companies being heralded as a good investment in 2018. Thanks to the new tax law, Continental took home an extra $700 million because its effective tax rate for 2017 was negative 406 percent.
In 2007 Continental had $165 million in debt and paid $13 million a year in interest on that debt. In 2016 its debt had ballooned to $6.5 billion and the annual interest payments rose to $321 million. The GOP tax law essentially pays off two years of Continental’s interest payments, allowing this failing business model to continue because Continental has not been generating enough income to pay even the annual interest on its debt.
In 2017, Anadarko CEO Al Walker told an investor conference that Wall Street investors were the problem:
Imagine begging banks to stop loaning you money. And being ignored.“The biggest problem our industry faces today is you guys. You guys can help us help ourselves. It’s kind of like going to AA. You know, we need a partner. We really need the investment community to show discipline.”
The Economist summarized the situation in 2017:
Higher oil prices are now being touted as the industry’s savior but, as The Economist noted, the shale industry was losing money even when oil was $100 a barrel. Imagine a company losing $1 billion on a revenue of $700 million per annum. Well the fracking oil industry has dozens of companies that not only fit that description, but been doing it for years.“It [the shale industry] has burned up cash whether the oil price was at $100, as in 2014, or at about $50, as it was during the past three months. The biggest 60 firms in aggregate have used up $9 billion per quarter on average for the past five years.”
Lets go back to Continental. The company recently reported plans to drill 350 new wells at an estimated cost of $11.7 million per well, which adds up to over $4 billion in total costs on those wells. The company currently holds more than $6 billion in debt and less than $100 million cash.
Anybody see similarities between this and housing market crash in 2008. What would happen when investors finally wake up and lose their appetite for an industry that has been losing money for more than a decade?