Shale Driller Debt Burden Puts 400,000 Oil Barrels at Risk

(Bloomberg) -- As much as 400,000 barrels a day of oil production is at risk as U.S. shale companies like Samson Resources Co. run out of money and are forced to slow drilling.

Total debt for half of the companies in a Bloomberg index of more than 60 producers has risen to a level that represents 40 percent of their enterprise value. It’s a sign of distress that shows equity values falling in the face of oil’s crash, said Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors LLC who helps manage $15.6 billion.

The companies facing high debt loads, which include Encana Corp. and Chesapeake Energy Corp., produced 1.1 million barrels of oil a day in the second quarter of this year, according to data compiled by Bloomberg. If more companies file for bankruptcy as Samson did Wednesday, or embrace the kinds of draconian cuts needed to survive, output could fall by 200,000 to 400,000 barrels, Thummel said. That’s about the amount of oil from Oklahoma, the sixth-largest producing state, which pumped 356,000 barrels a day in June, government data show.

“We are going to see a major response because these financially challenged companies won’t be able to produce as much as they did in the past,” he said.

As companies run low on cash, they may be forced to idle drilling rigs, confront bankruptcy or seek more-expensive financing and sell assets.

Producers who hoped for a price rebound later this year have so far been disappointed. U.S. oil futures fell to $45.06 Friday in New York before rebounding to $45.32 at 10:21 a.m. Futures are down by half in the past year. A glut of crude may keep oil prices low for the next 15 years, according to Goldman Sachs Group Inc.

Grim Choices

Most shale companies can’t make money at Goldman’s $50 price forecast. With less demand now from investors for new shares or debt, producers face a handful of grim choices. Those that opt for bankruptcy or debt restructuring are likely to slow drilling, said Marc Schwartz, a partner at consultant HSSK LLC who works on energy bankruptcy and debt deals.


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Copyright 2016 Bloomberg News.


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