A wave of failures
Since the beginning of the pandemic, crude oil has depreciated by about 50%. In April, due to an unprecedented contraction in fuel demand, as well as due to surplus fuel reserves in deposits, futures hit a negative sign.
As a result, hundreds of U.S. oil and gas companies found themselves on the verge of bankruptcy. For example, Parsley Energy has closed 150 fields, Continental Resources has reduced extractions by a third, Texland Petroleum has even stopped them completely.
In April, one of the largest shale extracting companies, Whiting Petroleum, went bankrupt, followed by the service company Hornbeck Offshore Services. California Resources California and giant Chesapeake Energy communicated to investors in May that they will likely be forced to cease trading.
Experts warn: this is only the beginning of a wave of bankruptcies that will soon hit the sector. According to Pickering Energy Partners forecasts, the crisis this year will affect about 40% of companies in the sector.
“The coronavirus pandemic has seriously damaged the oil sector, generating a rapid contraction in the demand for petrol, diesel and aviation fuel. Add to this the “epic price war” between Russia and Saudi Arabia and the huge debts of US oil companies. These elements will almost certainly generate a wave of bankruptcies in the coming months. Unlike the 2014-2016 oil crisis, many companies will not survive, “predict Bloomberg Intelligence experts.
According to a Dallas Fed study, even companies that are traditionally cheaper in the Permian Basin (western Texas) will need to sell on average at $ 49 a barrel to be on par. As the Fed predicts, only 15% of producers will survive if they sell at $ 40 a barrel for 1 year.
In this context, the shale-producing companies become an easy and attractive prey for the “fusions hunters”. The main threat is China, where restrictions are being lifted, the economy is recovering, and interest in foreign businesses now devalued is growing.
In Washington they fear that China will take over the energy sector in difficulty.
“The prospects for the acquisition of Texan shale companies in difficulty by hostile countries is a serious problem for national security,” said the sector’s Texan regulatory bodies.
The risk is real: the American operations of the sector have devalued significantly. In fact, the average price of oil fields has halved since oil cost $ 60 a barrel: from $ 42,000 to $ 20,000.
“American shale mining companies are the clear target of the Chinese because of unprecedented contraction in demand, low fuel prices and extreme indebtedness,” says OilPrice.
The coronavirus crisis did not spare Chinese companies, but it did not even soften Beijing’s appetite for acquisitions of interesting businesses. One example is China Reform’s recent attempt to acquire Imagination, the largest British smartphone chip maker. The deal only jumped after British authorities stepped in.
It is unlikely that the Chinese will directly acquire US oil companies: obviously the government will closely follow any negotiations. But different scenarios open up: for example, the purchase of a branch of non-strategic activities or the creation of joint ventures.
For example, in 2015, the Chinese company Yantai Xinchao Industry Co. was granted by the CFIUS (Committee on Foreign Investments in the United States of America) to purchase assets in the oil sector for 1.3 billion dollars through the companies Tall City Exploration and Plymouth Petroleum in the Permian Basin.
There is no choice
Observers note that shale extracting companies do not actually have great alternatives. Over the next 4 years, they will have to repay lenders $ 86 billion, but they have no funds to honor these debts.
At the moment, the proceeds from the sale of shale extracted in the USA are entirely allocated to the payment of interest on corporate bonds. The fund’s overall debt has exceeded $ 300 billion, and 9 billion barrels of fuel will be needed to pay it off, which is approximately as much as the companies in the sector have extracted throughout their existence.
The financing situation is disastrous. For investors, shale companies have proven to be a “bad apple,” says FactSet, an international analysis company. Since 2007, the index that groups the shares of the companies in the sector has registered a drop of 31% while the S&P 500 has grown by 80%. Over the same period, producers lost $ 280 billion more than the proceeds from the sale of crude oil and gas.
Perhaps only a rise in crude oil could save these companies. Over the past 3 weeks, WTI crude oil prices have stood at $ 33 a barrel. But this is clearly not enough: given the structural losses that the sector has known, it would be useful to sell at least 50 dollars a barrel to make some profit.
According to forecasts of the EIA (Energy Information Administration), the average price of Brent in 2020 will reach $ 34.13 and 45.62 in 2021, while that of the WTI at 30.10 this year and 43.31 the next .