CNBC | Patti Domm | December 18, 2019
The U.S. oil industry shook up the world energy order in the last decade, and now it has been going through a shakeout of its own that is expected to end in more bankruptcies and mergers.
In the early part of this century, an upstart band of U.S. energy producers brought hydraulic fracturing, or “fracking” technology, to the world. It was an American-born innovation that helped turn the U.S. from the world’s biggest importer of oil into, just recently, a net exporter of oil and fuel products.
With their growing success, American drillers were able to find ready debt financing as investors were willing to gamble on the idea that wells could start producing in a fraction of the time it took more conventional drillers. That helped drive an oil glut and global prices suffered from oversupply. The imbalance is improving, but now there are questions about how fast demand will grow.
Investors have lost patience with the industry’s boom-to-bust cycles. As a result, energy stocks have been among the worst performers of the decade, up just 4%, and energy debt is among the least desirable.
“There’s going to be a hatchet taken to these companies in the next year,” said John Kilduff, partner with Again Capital. “There will be bankruptcies and consolidation. The party is over.”
The growth of U.S. shale created a boom-town atmosphere in the places where drilling was growing most — West Texas and North Dakota. But it also disrupted the entire world oil market.
In what would have been unheard of a decade ago, Saudi Arabia and OPEC forged a deal with Russia and other non-OPEC producers to control their production to support oil prices. The recent extension of this three-year-old pact has helped steady prices.
Unlike many of those producers, the U.S. industry is untethered, with no government deciding production levels, and its only constraints are economic and financial. That has made life hard for U.S. drillers this year, with oil prices below their break-even level much of the year. West Texas Intermediate crude futures were at $60.81 per barrel Tuesday.
“We’re at the early stages [of the shakeout]. The problem is some of these companies still have a bit of rope to go,” said Ken Monaghan, Amundi Pioneer co-director of high yield. “They don’t have [debt] maturities that are coming up in 2020 and 2021. They’re going to try to out run the clock and hope that oil prices move higher.”
Daniel Yergin, who has authored books on the evolution of the oil industry, said the U.S. industry is likely to morph now, as the industry hits an inflection point. The oil majors, like ExxonMobil and Chevron, were slow to join the shale boom. But now they and the biggest oil independents will increasingly dominate the industry over the core of small independents and mom-and-pop oil drillers that launched the industry.
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