JPMorgan Chase declined to comment. Capital One didn’t respond to requests for comment.
The tightening financial pressure on shale producers is one of the reasons many are facing a reckoning going into next year. Chevron Corp. said Dec. 10 that it plans to take a charge of $10 billion to $11 billion, roughly half of it tied to shale gas assets, which it said won’t be profitable soon. Royal Dutch Shell PLC said Friday it will take a roughly $2 billion impairment, and other companies are expected to follow suit in writing down assets, according to analysts and industry executives.
The heat is greatest for small and midsize shale producers, including many whose wells aren’t producing as much oil and gas as they had projected to lenders and investors. Some of those companies may be forced out of business, said Clark Sackschewsky, the managing principal of accounting firm BDO’s Houston tax practice. Large companies are likely to weather the blow because of their size and global asset diversity, but for some smaller shale operators, tightening access to bank loans could prove disastrous.
“We’ve got another year under our belts with the onshore fracking assets, which includes less than optimistic reserves results, less production than anticipated, a reduction in capital investment into the market,” Mr. Sackschewsky said.
Oil and gas producers expect banks to cut their revolving lines of credit by 10% as a result of the reviews, according to a survey of companies by the law firm Haynes & Boone LLP. The cuts may be more severe, say some people familiar with the reviews.
Banks have extended billions of dollars of reserve-backed loans, though the exact size of the market isn’t known. JPMorgan said in a regulatory filing in September that it has exposure to $44 billion in oil and gas loans, and Capital One said in October it has extended more than $3 billion in oil and gas loans. It wasn’t clear for either bank what proportion of those are backed by reserves.
Banks have typically applied a 10% discount to the value of reserves, meaning a shale company could borrow against 90% of its reserves as collateral. Banks have typically lent as much as 60% of that value. But some are now discounting the value by as much as 20%, the people say.
Meanwhile, some regional banks have begun writing off bad energy loans. Net charge-offs shot up at Huntington Bancshares in the last quarter. The Ohio-based lender attributed the move primarily to two energy loans where the borrowers’ production had not met expectations, Huntington Chief Executive Officer Stephen Steinour said in an interview.
“Geology and the assumptions were just flawed,” Mr. Steinour said.
Many investors have lost faith in the viability of shale drillers, as natural-gas prices stayed low and many companies broke promises on how much their wells would produce and when they would begin to turn a profit.
As investors have retreated, cracks have begun to show. Energy companies accounted for more than 90% of defaults on corporate debt in the third quarter, according to Moody’s Investors Service. There were more than 30 oil-company bankruptcies in 2019, exceeding the number in 2018 and 2017. Exploration and production companies are now carrying more than $100 billion in debt, according to Haynes & Boone.
Skepticism among banks has grown in part because lenders have more closely scrutinized public well data on production and seen that it is falling short of forecasts, as a Wall Street Journal analysis showed earlier this year.
Specifically, banks have begun questioning shale producers’ predictions about their wells’ initial rate of decline, which are proving overly optimistic, according to engineers. If shale wells, which produce rapidly early and then taper off, are declining faster than predicted, questions arise regarding how much they will ultimately produce.
Energy Producers’ New Year’s Resolution: Pay the Tab for the Shale Drilling Bonanza
North American oil-and-gas companies have more than $200 billion of debt maturing over the next four years.
The bill is coming due for the shale industry’s price war with OPEC.
North American oil-and-gas companies have more than $200 billion of debt maturing over the next four years, starting with more than $40 billion in 2020, according to Moody’s Investors Service.
It is a tab that producers, pipeline operators and oil-field service companies have run up battling the Organization of the Petroleum Exporting Countries for global market share.
It is unclear how they will repay it all. Shareholders and private-equity investors have been burned in recent years attempting to buy at the bottom. Banks are in retreat. Bond markets have shown little indication that they are open to any but the oil patch’s most attractive borrowers.
Analysts are predicting and investors hoping that the specter of debt maturities will prompt companies to do what low commodity prices and prodding from shareholders haven’t: stop drilling so many wells.
“Capital markets are putting enormous pressure on companies to behave like real economic vehicles,” said Ian Nieboer, managing director at RS Energy Group, an industry consulting firm. “A select group will be supported and others will have to be creative.”
Easy credit and enthusiastic investors fueled the North American shale-drilling boom that flooded the world with oil and gas.
OPEC, which sent crude prices plunging on Thanksgiving 2014 when it opted to keep pumping despite a glut, has since curtailed output to buoy prices.
Through it all, U.S. companies kept drilling. Average daily oil production has risen 34% since November 2014, reaching about 12.5 million barrels in September, according to the U.S. Energy Information Administration.
The plunge in prices triggered a wave of bankruptcies among oil-and-gas companies, but it didn’t stop investors from betting big on shale.
Companies with combined debt of $171.2 billion filed for bankruptcy protection from the start of 2015 through September 2018, according to data from law firm Haynes and Boone LLP. In that same time more than $250 billion of debt was issued to oil-and-gas companies, according to Moody’s.
Banks reduced the lines of credit they extended to energy producers as the oil-and-gas reserves that served as collateral lost value. Energy producers had little trouble raising cash early on.
North American oil-and-gas producers sold more than $70 billion of new shares after energy prices slumped and used the proceeds to pay down debt and keep rigs drilling. Energy stocks have performed miserably in recent years, though.
Although the sector’s shares have gotten a lift in recent weeks from an uptick in oil prices, shares of more than 50 U.S. exploration-and-production companies tracked by The Wall Street Journal ended 2019 down 50% or more from their highest-ever prices, falling at a time when the broader stock market has surged to new heights.
In the three years after crude prices crashed, private-equity firms raised nearly $200 billion to buy oil and gas assets, according to data provider Preqin. The idea was to buy at the bottom and sell for a profit when oil prices bounced back. Prices haven’t fully recovered, though, and many private-equity energy investments have fared poorly.
“The U.S. exploration-and-production sector has spent too much capital for too long with meager returns,” Bank of America Merrill Lynch analysts wrote in a recent note to clients. “This golden era of unlimited capital availability has now ended.”
A select few companies have been able to sell debt, to be sure. Diamondback Energy Inc. sold $3 billion of bonds in November to pay off higher interest notes, reduce its bank debt and cover other expenses. The West Texas driller, with a stock market value of nearly $15 billion, is a favorite among investors for its plum drilling properties in the Permian Basin, growing dividend and strong balance sheet. According to FactSet, 29 of 30 analysts that track the stock recommend buying Diamondback; one suggests holding the shares.
Most companies won’t have the same options as Diamondback. For them, analysts predict austerity, which means a lot less drilling. Evercore ISI analysts estimate a 5.9% decrease in spending by North American exploration-and-production companies in 2020. Barclays analysts expect 10% less will be spent drilling on land in the U.S.
A lot of companies have pledged restraint, yet their promises to spend only what they earn selling oil and gas are already being put to the test by rising oil prices.
U.S. oil prices gained more than a third in 2019, including an 11% climb in December on OPEC’s promised production cuts. So far, though, producers have held back. The number of rigs drilling in the U.S. was 805 last week, down about 25% from the end of 2018, according to oil-field services firm Baker Hughes Co.
Analysts say that is a sign that producers are sticking to their budgets and harvesting cash from higher oil prices to pay down debt and pay dividends to shareholders rather than spending it drilling more wells.
Schlumberger Plans U.S. Pullback as Shale Oil Drillers Struggle
World’s largest oilfield services company said it was focusing on international prospects after a tough year.
The world’s largest oil-field services company, Schlumberger Ltd., SLB +1.20% is pulling back from the U.S. and focusing on international projects as a slowdown in shale drilling reverberates through the industry.
Chief Executive Olivier Le Peuch said Friday that diminishing shale production growth could reduce a plentiful supply of oil globally and create greater market reliance on production outside the U.S. The company is positioning itself accordingly, he said, restructuring its business in the U.S. and reducing its fracking fleet there by 50% while diverting spending abroad.
“The international market is poised for further growth,” Mr. Le Peuch said on a call with investors. “By contrast, North America will depend on our execution of our strategy. There is downside risk.”
Schlumberger’s business in the U.S. weighed on the company’s performance throughout 2019. The company reported a more than $10 billion net loss for the full year due to more than $12 billion in write-downs, most of them related to U.S. assets.
In the fourth quarter, Schlumberger’s profit also fell as it reported an increase in various charges, most of them also related to its U.S. business. The company said Friday net income was $333 million for the quarter, down 38% from the comparable quarter a year earlier, as a reduction in spending by U.S. shale producers cut into revenues.
“North America revenue of $2.5 billion…dropped 14% sequentially due to customer budget exhaustion and cash flow constraints,” Mr. Le Peuch said. Earnings per share were 24 cents, down from 39 cents a share.
Meanwhile, prospects abroad have grown brighter for the company. While full-year world-wide revenue of $32.9 billion was flat compared with a year prior, international revenue grew 7%, compared with a 10% decline in North America.
Investors have cut off cash infusions to shale producers, after frackers have largely failed to turn a profit for years. Meanwhile, technology gains in the shale patch have slowed as drillers struggle to wring more oil from each well. Those factors have forced austerity on shale producers, whose dwindling budgets have had a severe impact on the service companies who drill and frack their wells.
Mr. Le Peuch said he expects spending by North American producers to potentially decline by more than 10% in 2020. By contrast, international spending will grow by 5% or more, he said, as companies return to offshore projects.
The oil-and-gas industry had pulled back from costly offshore projects in recent years as companies focused investment on promising shale prospects. But as profits have failed to materialize a decade into the shale boom, major oil companies including Exxon Mobil Corp. and Chevron Corp., are recalibrating.
Chevron and Exxon Mobil have written off billions in U.S. natural gas assets in recent years, shifting their shale focus primarily to the oil-rich Permian basin in Texas and New Mexico. Both have also renewed their appetite for offshore projects.
Chevron recently approved a large offshore project in the Gulf of Mexico and Exxon has been investing heavily in a huge oil find in the waters off the coast of Guyana, where oil began flowing in December.
Schlumberger has been re-evaluating its business in the U.S. at the direction of Mr. Le Peuch, who became CEO in July. He said Friday that review had prompted a retrenchment in the U.S.
Going forward, Schlumberger will reduce its operating locations by 25%, focusing on only three hubs near the largest shale basins. In addition to the dramatic cuts to its fracking fleet, the company has laid off more than 1,400 employees in North America, and Mr. Le Peuch said Friday that further workforce reductions are possible.
The company recorded $456 million in impairment and other charges from items including restructuring in North America and workforce reductions. A year earlier, the company recorded $172 million in various charges.
“As the year progresses, the effect of slowing North America production growth is likely to cause tightness in the market and further stimulate international operators to step up their investments in the second half of the year and beyond,” Mr. Le Peuch said.