ANALYSIS: US shale drillers may be vulnerable to oil price below $50, even while investment shows no sign of slowing
By Gerard Wynn
Some major US shale oil and gas producers may be vulnerable to a sustained WTI crude oil price of around $50 and lower, even before their protective hedges expire this year, new analysis shows.
All the while, investors are backing the sector with record amounts of capital.
Oil prices have risen over the past month, but last year’s experience underlines their volatility.
The Carbon Tracker Initiative analysis, which I co-authored, investigated five major shale independents, and made three conclusions.
First, it found that at sustained oil prices below around $50 a barrel, some companies such as Whiting Petroleum would approach debt covenants agreed under their senior credit facilities.
Chesapeake appeared sensitive to oil prices below $50 coupled with gas prices below $2.25 per mcf. These covenants are lines which creditors expect companies not to cross.
This was a static, illustrative analysis.
In the real world, options for evasive action not to exceed covenants would include capital raisings, or a re-negotiation with creditors. But the findings illustrated their sensitivity to lower oil and gas prices.
Second, oil hedges on all five companies would decline this year, and expire altogether for most (see chart below).
The hedges will protect the companies in 2015, raising around $1.2 billion in the case of Chesapeake, for example.
The question is how companies will replace such revenues in 2016, given any replacement hedges will be at less attractive prices (perhaps around $60 compared with $75-95 or so this year).
And third, investors have backed the sector with a record amount of capital so far this year.
The first quarter and the month of March were both records for public equity offerings, by U.S. exploration and production energy companies.
And as of April 30 they had issued some $18 billion in high yield bonds, compared with $36 billion outstanding for the whole of last year.
What does it all mean? Investors should be aware that these relatively high-cost producers have still not felt the full effect of collapsing commodity prices.