The recent rebound in oil prices (from the low $20s to the upper $40s) has come too late for many US oil and gas drillers, which have found themselves financially overextended by the prolonged down market.
The casualties in the US exploration and production segment have been steadily mounting. There have been about 30 US oil and gas bankruptcies in 2016 alone, and about 70 since the beginning of 2015.
In an October 22, 2014, Bizmology post, I wrote the following:
“Thanks to high oil prices ($100-plus a barrel), the US has seen a revolution in the production of oil and natural gas from previously hard-to-access shale basins over the past decade. Technology has been a key to be sure, with hydraulic fracturing and horizontal drilling leading the way. But the price of oil has played its part too. The $100-plus oil prices have made the expensive business of oil and gas production from US shale basins (at up to $8 million a drilling rig) a commercially successful proposition.”
What a difference 18 months of prolonged low prices make. Even the most robust oil and gas driller has found itself drowning in debt.
SandRidge Energy became the latest victim, with the Oklahoma City-based shale driller filing for Chapter 11 bankruptcy earlier this week. With about $4 billion of debt, SandRidge became the second-largest US oil company to file for bankruptcy during the current oil slump.
The title of the industry’s largest bankruptcy so far goes to Linn Energy, which filed for Chapter 11 bankruptcy protection with more than $10 billion in debt.
Last year US drillers defaulted on $13.6 billion of the high-yield debt that creditors had gladly provided years earlier (when $100-a-barrel prices were more than adequate to fund ambitious E&P activities).
In this bust, oil companies continue to grapple with diminished cash flows as they’ve cut back on production and have to deal with both lower production volumes and lower prices.
I don’t think a $50 oil price will get the shell-shocked industry players back in the market. It’s going to take oil pricing consistently in the $65-to-$80-a-barrel range, to convince them (and their financiers) to ramp up US drilling activity in earnest.
But here’s some good news. In the oil business, after a bust there’s always a boom.
British editorial veteran Stuart Hampton has been covering oil and gas companies for Hoover’s since the Neogene-Quaternary period. Well, actually, since the early 1990s. For the best overview of the oil industry and its history he recommends Daniel Yergin’s “The Prize.” You can also follow Stuart on Twitter.
Photo courtesy of SandRidge Energy.