For U.S. shale, a disaster lies ahead. The industry has been largely unprofitable to date, but had received several rounds of huge injections of capital in the last decade, most recently following the 2016 downturn. But by last year, investors had begun to sour on unprofitable shale drilling.
Energy stocks collapsed and access to capital became increasingly scarce.
That was all true before the coronavirus and before the failed OPEC+ meeting. Now, U.S. shale will likely find itself in a state of true crisis.
Unlike a few years ago, recapitalization in any meaningful way is off the table. Capital markets have turned off the spigot. Also, the twice-a-year credit redetermination period is getting underway, and the most recent slide in prices will likely mean an immediate cut to credit lines from lenders.
Worse, the wave of debt taken out during the 2014-2016 downturn is about to come due. North American oil and gas companies have more than $200 billion in debt maturing over the next four years, with $40 billion due this year.
A barrel of Brent crude stood at $33.09 a barrel on Monday morning, a fall of 27percent. It was the worst one-day fall for Brent since the start of the first Gulf war in 1991. US crude fell 27percent to $30.
Recall, Alexander Novak told his Saudi Arabian counterpart Prince Abdulaziz bin Salman that Russia was unwilling to cut oil production further. The Kremlin had decided that propping up prices as the coronavirus ravaged energy demand would be a gift to the U.S. shale industry
But the decision to take on shale could backfire. While many drillers in Texas and other shale regions look vulnerable, as they’re overly indebted and already battered by rock-bottom natural gas prices, significant declines in U.S. production may take time.
The largest American oil companies, Exxon Mobil Corp. and Chevron Corp., now control many shale wells and have the balance sheets to withstand lower prices. Some smaller drillers may go out of business, but many will have bought financial hedges against the drop in crude.
