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Crude Economics
Bankruptcies Abound as Cheap Crude Checks Shale Boom

Bargain crude hurts all oil producers, petrostate and private alike, and while much has been made about the struggles OPEC’s members are enduring as they face massive budget deficits as a result of collapsing prices, on the private side of things dozens of companies are going bankrupt, unable to cope with vanishing profit margins. Just this week one of the biggest American oil companies filed for bankruptcy protection, as the FT reports:

Linn Energy, the Houston-based oil and gas producer, has become the biggest US casualty of the plunge in crude prices over the past two years, filing for bankruptcy on Wednesday evening. […]

The group, which is one of the 20 largest oil and gas producers in the US, reported total debts of $9.3bn in February. Those borrowings make it the largest debtor among about 70 North American exploration and production companies that have gone bankrupt in this downturn, according to Haynes and Boone, the law firm.

Linn Energy may be the biggest American firm to go under as a result of cheap oil, but it is by no means the only one, as Bloomberg reports:

Since the start of 2015, 130 North American oil and gas producers and service companies have filed for bankruptcy owing almost $44 billion, according to law firm Haynes & Boone. The tally doesn’t include Chaparral Energy Inc., Penn Virginia Corp. and Linn Energy LLC, which filed for bankruptcy this week owing more than $11 billion combined.

At least four more oil and gas companies owing more than $8 billion are nearing default, including Breitburn Energy Partners LP and SandRidge Energy Inc. Bankruptcies have accelerated as cash-starved companies find it almost impossible to raise capital. Energy companies have been virtually shut out of the high-yield bond markets, banks are cutting credit lines and asset sales have slowed.

We’ve pointed out the extraordinary ability of U.S. oil producers to keep their output up in the face of sub-$40 (now sub-$50) crude prices, made all the more remarkable when you acknowledge the fact that shale operations are relatively expensive, and that before the price collapse many figured most of these plays would stop being profitable under $75 per barrel.

But while American oil production didn’t immediately fall off a cliff as plenty of people expected, it’s now on a significant downward trajectory: we produced just over 8.8 million barrels per day (bpd) last week, nearly 800,000 bpd off last June’s peak of just under 9.6 million bpd. As more companies fold under the weight of accrued debt, we can expect this decline to continue.

Meanwhile, OPEC’s output is surging after the cartel failed to agree on a production freeze plan last month. This is a fight for market share, pure and simple, and though shale producers are actively innovating new ways to make money fracking at today’s price levels, the heady days of $100+ per barrel prices are a distant memory, as is the likelihood of American production breaking 10 million bpd anytime soon.

The shale boom hasn’t gone bust—we’re still producing well over 3 million bpd more than we were before fracking remade the U.S. energy landscape—but its momentum has been checked, harshly.

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  • Jacksonian_Libertarian

    This is called “creative destruction” in free market terms, weak poorly managed companies get tossed, and their assets get sold at auction at sale prices. The Government Monopoly owned Oil Monopolies of OPEC don’t have any way of getting rid of the “Deadwood”, and therefore waste, corruption, and inefficiency just continuously accumulate.

    • rheddles

      Sort of like the Government Monopoly public schools.

  • Kevin

    That it’s necessary doesn’t mean that it’s not a tragedy at the personal level for employees and owners.

  • Blackbeard

    The next step will be for Hillary to outlaw fracking or regulate it so brutally that it’s all but outlawed. Obama couldn’t afford to do that when oil was $100 a barrel or more but now, with the world awash in oil, Hillary can get away with it. Once fracking is dead Step 3 will be for OPEC to get oil back to $100 a barrel again.

    The fracking era was fun but the Greens were never going to let it upset their plans.

  • Andrew Allison

    I think that we need to be more careful about the conclusions which we draw. First, as TAI frequently reminds us, there’s the fracklog awaiting higher prices. Secondly, the bankruptcies, in effect, reduce the costs of production by reducing debt and/or debt servicing costs.

    • Kevin

      Good poin – but they also reduce access to capital as few want to invest in or loan to an industry facing these issues.

  • Proud Skeptic

    It’s the market. God bless the market.

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