Report Projects $300B in Possible Asset Write-downs for Shale

Report Projects $300B in Possible Asset Write-downs for Shale
A surge in asset impairments in the upcoming 2Q earnings cycle could trigger a 'great compression' period in the US shale industry characterized by bankruptcies and deep consolidation, according to Deloitte.

A surge in asset impairments in the upcoming second-quarter earnings cycle could trigger a “great compression” period in the U.S. shale industry characterized by bankruptcies and deep consolidation, according to a new study from Deloitte.

“The history of oil and gas is filled with periods of extensive consolidation,” Duane Dickson, Deloitte LLP’s vice chairman and U.S. oil, gas and chemicals leader, remarked in a written statement emailed to Rigzone. “Following a 15-year boom, the U.S. shale segment appears to be next. As COVID-19 impacts amplify pressures on shale companies through 2020, a wave of impairments may prompt the deepest consolidation has ever seen over the next six to 12 months.”

Noting the U.S. shale sector was already losing money before the pandemic hit, Deloitte contends the added weight of lower oil prices, reduced demand, capital constraints, heavy debt loads and COVID-led economic uncertainty could drive the shale industry to write down their assets’ value by up to $300 billion during the great compression. The consultancy added the industry’s leverage ratio could jump from 40 to 54 percent, potentially starting a “chain reaction of insolvencies and restructuring.”

The Deloitte study also found that approximately 30 percent of shale operators are technically insolvent at an oil price of $35 per barrel – and 50 percent at $20 per barrel. In addition, the firm pointed out the following factors have moved up "the specter of peak demand to the present”:

  • new telecommuting norms
  • regionalized trade and supply chains
  • a “new fuel order”
  • a stable business profile for new energies.

“While a combination of global production cuts, easing of lockdowns worldwide, capex reductions and accelerated field decline rates have helped oil prices to recover from sub-zero levels, it remains to be seen if oil prices will return to $50 to $60 per barrel in 2020,” Deloitte stated.

The firm added the above new realities could reverberate beyond the U.S. shale industry, with effects spanning the oil and gas value chain. Also, the study concludes that just 27 percent of top U.S. shale operators are attractive acquisition targets for supermajors or large independents. It classifies roughly one-half of major exploration and production firms as “superfluous” – risky bets for potential buyers.

To be sure, Deloitte also foresees a potential upside for some companies.

“The short-term outlook for U.S. shale is undeniably challenging, but E&Ps should regard the great compression as a unique opportunity for reinvention,” commented Scott Sanderson, principal and Deloitte Consulting LLP’s oil and gas strategy and operations practice. “Selective consolidation among producers in the short-term can help revitalize the industry and better position it for the future. Especially as the energy transition moves forward, investment in big data, advanced digitalization and sustainability measures can be of paramount importance to long-term survival and success.”

The study is available on Deloitte’s website.

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