U.S. Shale Drillers Are Drowning in Debt

Updated on
  • Samson bankruptcy shows potential market impact of fallout
  • Debt for 30 companies rises to above 40% of enterprise value
Photographer: Brittany Sowacke/Bloomberg

As much as 400,000 barrels a day of oil production is at risk as U.S. shale companies like Samson Resources Co. run out of money and are forced to slow drilling.

Total debt for half of the companies in a Bloomberg index of more than 60 producers has risen to a level that represents 40 percent of their enterprise value. It’s a sign of distress that shows equity values falling in the face of oil’s crash, said Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC who helps manage $15.6 billion.

The companies facing high debt loads, which include Encana Corp. and Chesapeake Energy Corp., produced 1.1 million barrels of oil a day in the second quarter of this year, according to data compiled by Bloomberg. If more companies file for bankruptcy as Samson did Wednesday, or embrace the kinds of draconian cuts needed to survive, output could fall by 200,000 to 400,000 barrels, Thummel said.

A loss of that much crude would be the steepest U.S. decline since 1989, about the amount of oil from Oklahoma, the sixth-largest producing state, which pumped 356,000 barrels a day in June, government data show.

“We are going to see a major response because these financially challenged companies won’t be able to produce as much as they did in the past,” he said.

As companies run low on cash, they may be forced to idle drilling rigs, confront bankruptcy or seek more expensive financing and sell assets. In the past year, U.S. oil producers used 83 percent of their operating cash flow to pay for debt service, according to the U.S. Energy Information Administration. A year ago, it was less than 60 percent.

Producers who hoped for a price rebound later this year have so far been disappointed. U.S. oil futures fell to $45.26 at 12:48 p.m. Friday, and are down by half in the past year. A glut of crude may keep oil prices low for the next 15 years, according to Goldman Sachs Group Inc.

Grim Choices

Most shale companies can’t make money at Goldman’s $50 price forecast. With less demand now from investors for new shares or debt, producers face a handful of grim choices. Those that opt for bankruptcy or debt restructuring are likely to slow drilling, said Marc Schwartz, a partner at consultant HSSK LLC who works on energy bankruptcy and debt deals.

“The wells that are producing will keep producing because they can still sell the oil for more than it costs to shut them in,” he said. “But in the shale plays, which need constant new drilling to keep output high, some production will dry up because of the capital cost of going out and producing more.”

In many cases, new wells won’t get drilled until restructuring is complete, he said.

Spokesmen for Chesapeake, Encana, Whiting Petroleum Corp. and California Resources Corp. didn’t immediately respond to e-mails for comment.

Denbury is one of the more proactive exploration and production companies when it comes to managing its debt, most of which is not coming due until after 2020, said Ross Campbell, a company spokesman.

Double Dip

In the case of Samson, which was acquired by private equity firm KKR & Co. and other investors in 2012 for $7.2 billion, the company expects no new drilling this year. Production, which is mostly natural gas, would fall by 7 percent this year, 30 percent in 2016, and an additional 20 percent in the next year, according to company filings.

“A lot of investors earlier in the year thought they would do well by coming into the market, but then there was a double dip in prices,” said William Arnold, a former executive at Royal Dutch Shell Plc who teaches at Rice University in Houston. “It’s going to be a very tough time for these struggling companies.”