US Shale Companies: The Chink In America’s Armor

Over the past 5 years, US Shale Companies have borrowed billions of dollars in cheap debt, which they haven’t repaid all while the price of oil has gone from $115 down to $44 in 6 months. To make matters worse the price of oil has remained low for months now. This has forced US Shale Companies to slash capex ie. future production to make debt payments. The problem here is that horizontal shale wells have a much shorter life span than traditional wells. Most shale wells decline by over 80% in just 3 years. So meanwhile these companies are pumping out record amounts of oil to keep revenues up, what they are really pumping out is what’s left of their extremely limited supply of oil. To make matters worse they are dumping it a basement prices!  There’s no  way the majority of  these companies will ever  pay back their debts with cheaper oil and decreased supplies and higher interest rates.

It seems the banks are no longer interested in this toxic mix and have stopped lending money even as energy junk bond yields have spiked.  With a Fed rate hike imminent banks seem unwilling to lend. In the chart below, my guess that biggest spike in credit rejection ever is primarily from US Shale and gas companies asking for another loan.

The price of oil meanwhile remains depressed as oil production from abroad continues to increase. Saudi Arabia has added 700,000bpd since December 2014. On the demand side, China’s epic slow down continues in a snowball like fashion which should lead to a further slow down in demand. The price of oil should remain low for the next 6 months which should be more than sufficient to sink these Fed created monstrosities.