Historic oil rout poised to bust shale

Bloomberg

A historic crash in crude prices is driving US shale into full-on retreat with operators halting new drilling and shutting in old wells, moves that could cut output by 20% for the world’s biggest producer of oil.
For shale companies, the price of West Texas Intermediate crude went from hunker-down-and-ride-it-out mode to crisis mode in just a few days, with many now unsure whether there will even be a market for their oil. Some 1.75 million barrels a day is at immediate risk of shutting down while the number of new wells being brought online is forecast to plunge almost 90% by the end of the year, according to IHS Markit Ltd.
In short, it’s a swift and brutal end to the shale revolution, which only last year had President Donald Trump proclaiming “American Energy Dominance.”
West Texas Intermediate crude prices turned negative for the first time in history, meaning at one point sellers had to pay buyers to take it away.
Then, the financial squeeze on the May contract spilled over to June and into the wider market, with prices now trading around $10 a barrel, well below the daily pumping cost in large swaths of America’s oil industry. Even at $15, “everything back in the field, except the newest and most productive wells, is losing money
on a cash-cost basis,” said Raoul LeBlanc, a Houston-based analyst at IHS Markit.
“At this price you’ll start shutting in large amounts of production.”
It’s a bloodbath whichever way you look. Operators are switching off wells, retiring one in three drill rigs, abandoning fracking, laying off 51,000 workers, slashing salaries and even going bankrupt just six weeks after the latest price plunge began. Now, with the coronavirus pandemic destroying demand, storage is just weeks away from filling up, a further factor choking back output.
Publicly-traded companies have axed more than $31 billion from drilling budgets, while distressed debt in the US energy sector has jumped to $190 billion, up more than $11 billion in less than a week.
Oil companies made up five of the top 10 issuers with the most distressed debt as of April 21.
The potential for zero revenues in the second and third quarters this year may mean that large US oil explorers burn through $7 billion in liquidity, according to a Webinar hosted by Evercore ISI. By the end of it all, as many as 30% of publicly traded shale explorers could be forced to exit the market one way or another, the Evercore analysts said.
For Gene Ames, an 85-year-old, fourth-generation oilman who was born in the East Texas oil rush during the Great Depression, when crude traded for 5 cents a barrel, it’s the worst crash he’s ever seen. “I’ve been through about six major busts and so far this is going to be the worst,” he said. “It’s the most intense, quickest and deepest collapse.”
In Houston, America’s oil capital, the pain is set to
reverberate across the broader economy.