The fate of the U.S. shale industry seems to be doomed, at least in the near term, with industry players projected to write down the value of their assets by a whopping $300 billion, per a recent estimate by Deloitte. The firm expects the industry to witness notable resource impairments and asset write-offs during the second quarter of 2020, which, in the worst case scenario, might lead to a wave of bankruptcies.
Such estimated impairment charges cloud the industry's growth prospects. On top of that, with debt level staying the same, it’s the industry’s leverage ratio, which is going to shoot up in the near future. The Deloitte report has found 30% of shale operators being technically insolvent with oil prices at $35, while 20% are stressed financially.
Reasons Behind the Industry’s Fall
Thanks to the inelastic demand for petroleum, backed by rapidly increasing transportation, construction, power generation and travelling activities, the U.S. shale industry has been booming over the past few years. Nevertheless, this boom seems to have been only in terms of oil production growth and not in terms of cash generation. Notably, tight oil production more than doubled over the past five to six years. However, the industry experienced over $450 billion of invested capital impairment and lost $300 billion in net cash flow over the past 15 years.
One of the primary headwinds affecting this industry’s players is oil price war among producers. Even as the industry was coping with this headwind, the novel coronavirus outbreak hit hard and changed the entire dynamics. Starting from March 2020, oil demand started to sink rapidly as stringent lockdowns were imposed and regular economic activities were stalled. Consequently, oil prices tumbled significantly and reached its worst, causing West Texas Intermediate (WTI) crude to plunge into negative territory for the first time, owing to repressed demand and lack of oil storage. Adding to the woes of the industry, along with the price fall came significant production cuts. According to data from Genscape, oil price crash led to at least 1.5 million bpd of production shut-ins between the beginning of April and late May.
Stocks to Watch
With the U.S. shale industry having witnessed over 190 bankruptcies since 2010, we focus on the following oil stocks that have either reportedly filed for bankruptcy or are expected to do so going forward. Since their 2020 sales and earnings estimates indicated dismal performance, prudent investors need to exercise caution while keeping them in their portfolio.
Whiting Petroleum Corporation (WLL - Free Report) : Denver, CO-based Whiting Petroleum Corporation is an independent energy company engaged in the exploration, development and production of crude oil and natural gas properties in the United States. It filed for bankruptcy on Apr 1, making it the first U.S. shale producer to go for insolvency. The Zacks Consensus Estimate for its 2020 sales indicates decline of 43.9%, while that for earnings indicates a plunge of 386.1%.
Extraction OG (XOGAQ - Free Report) : Denver-based Extraction Oil& Gas is focused on the acquisition, development and production of oil, natural gas and natural gas liquids reserves. In mid-June, it filed for bankruptcy. The Zacks Consensus Estimate for 2020 sales implies decline of 29.4%, while that for earnings indicates a drop of 93.5%.
Chesapeake Energy Corp. : Oklahoma City, OK –based Chesapeake Energy is primarily an oil, natural gas and NGL exploration and production company. Per major media resources, this shale pioneer is preparing for a potential bankruptcy filing, after reporting a loss of $8.3 billion in the first quarter and skipping interest payments of $13.5 million, according to SEC filings. The consensus estimate for 2020 sales suggests decline of 18.4%, while that for earnings indicates decline of 43.8%.
California Resources Corporation (CRC - Free Report) : Los Angeles-based California Resources is engaged in exploration and production of oil and gas. The company is talking with lenders for a financing package of up to $600 million to carry its operations through a planned bankruptcy proceeding, after it failed to make a $30 million interest payment, the Wall Street Journal reported. The consensus estimate for its 2020 sales indicates decline of 36.1%, while that for earnings indicates a plunge of 885.7%.
Recovery in sight?
U.S. oil price has been ticking up a little bit over the past few days and so has been oil production. Still considering the fact that COVID-19 is here to stay for a while, along with its resultant economic turmoil, a stark rebound in the U.S. shale industry will be hard to achieve any time soon. Analysts at Enverus and IHS Markit told Bloomberg that production will likely take until at least 2023 to return to the pre-oil price crash levels.
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