"The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.
Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.
“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”
Some investors are already bailing out. On May 23, Loews Corp. (L), the holding company run by New York’s Tisch family, said it is weighing the sale of HighMount Exploration & Production LLC, its oil and natural gas subsidiary, at a loss.
HighMount lost $20 million in the first three months of the year, after being unprofitable in 2013 and 2012, Loews said it its financial reports. As with much of the industry, HighMount has shifted its focus to oil after natural gas prices plunged and has struggled to find sites worth developing, company records show."
http://www.bloomberg.com/news/2014-05-26/shakeout-threatens-shale-patch-as-frackers-go-for-broke.html------------
"Rice Energy Inc. (RICE), a natural gas producer with risky credit, raised $900 million in three days this month, $150 million more than it originally sought.
Not bad for the Canonsburg, Pennsylvania-based company’s first bond issue after going public in January.
Especially since it has lost money three years in a row, has drilled fewer than 50 wells -- most named after superheroes and monster trucks -- and said it will spend $4.09 for every $1 it earns in 2014. (note: emphasis mine.)
The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree.
While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it. (again: emphasis mine)
“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”"
http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html--------------
"· Oklahoma experienced 238 earthquakes between January and November of 2013, Reuters reported. One hundred of those quakes were 3.0 on the Richter scale or higher. The state experienced only three earthquakes of more than 3.0 between 1991 and 2008. The amount of fracking in Oklahoma increased by 50% between 2000 and 2012."
http://seekingalpha.com/article/2257193-possible-fracking-earthquake-link-could-challenge-oil-and-gas-industry------------------
Last but not least:
"The fierce debate over "fracking" in California grew louder Wednesday with a new report that drastically reduced the estimate of oil that existing technology could extract from the state's massive underground reserve. But now the federal agency that keeps track of the nation's energy reserves estimates that current fracking methods could extract only 600 million barrels of oil from the formation -- a far cry from the 13.7 billion barrels once thought to be recoverable. The new estimate was first reported by the Los Angeles Times."
http://www.mercurynews.com/california/ci_25810989/fracking-new-monterey-shale-oil-estimate-rocks-californias=========================================
This is not saying that the fracking boom is over. It's simply noting the likely nature of an eventual bust (maybe not 6 months from now, maybe not a year from now, but not years and years away), as if the tide ever goes out (recession, whatever) and it becomes unprofitable for some of these companies, there's going to be a fair amount of heavily indebted small producers that will go bust. That has at least mild-to-significant implications for pipelines, rail, oil services and other industries (the fracking sand names that have
skyrocketed in the last couple of years come to mind.)
Reading "The Boom" by a WSJ reporter about fracking (and the fact that there's a new book called "The Boom" means a bust is probably not that far off) which has an interesting pair of chapters on the rise and fall of Chesapeake Energy's CEO Aubrey McLendon.
Again, not saying it's over by any means, just saying that I would be watchful and I would lean any investments in oil towards the more established/financially sound companies. Any investments where the theme/view is entirely about fracking (whether oil or services or something else) should be done with caution and a focus on the biggest and best versus speculative names.)
Additionally, I think there is an aspect at play of how much in the way of resources can these plays produce vs how much can actually be brought out of the ground is a manner that is economically feasible.
I took some profits on Gibson Energy (GBNXF.PK) the other day, but am keeping the rest as a long-term holding, given what I think is the fairly unique nature of the company. I remain long nearly all of the rails, a trio of oil companies (two of which are Canadian, eh) and a couple of pipeline cos.
Comments
Canada's Non-Energy Exports Hit Record Low
The Huffington Post Canada | By Daniel Tencer Posted: 06/05/2014 1:02 pm EDT | Updated: 06/05/2014 1:59 pm EDT
Exports of non-energy goods have been on a downward swing for more than a decade, and hit an all-time low in the latest StatsCan report. As recently as 2006, we were selling more non-energy goods than we were buying, but that changed during the Great Recession and it hasn’t changed back.
This wouldn’t be a problem if energy exports could make up the difference. But, with about 8 per cent of Canada’s economy, the oil, gas and mining sector is hardly enough.
http://www.huffingtonpost.ca/2014/06/05/scariest-chart-canadian-economy_n_5453531.html
Did not know about the circuitous route of the condensate!
Canada's surprise light oil boom delights oil sands producers seeking diluent
June 6, 2014 9:51 AM ET
Condensate supply, though small, plays a critical role in the growth of Canadian oil sands, the world's third-largest crude reserves behind Saudi Arabia and Venezuela.
Because raw bitumen is too heavy and thick to flow easily through pipelines, it must be blended with around 30 percent of a lighter oil, known as diluent. A number of different types of hydrocarbons can do the job - including condensate, natural gasoline and synthetic crude oil. The diluent is then stripped out by refiners or terminal operators at the destination, often to be pumped back to Canada and blended again.
With oil sands production expected to nearly double over the next decade, demand for diluent is expected to surge to around 900,000 bpd in 2025, consultancy Wood Mackenzie said. Other forecasters suspect demand will be over 1 million bpd.
http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140606&id=17681179
Outlook For U.S. LNG Exports
Jun. 6, 2014 3:38 AM ET | Elliott Gue Seeking Alpha
At the same time, robust demand growth in China, coupled with the closure of Japan's nuclear reactors after the Fukushima-Daiichi disaster, has intensified competition for LNG volumes in the spot market and elevated prices to levels that incentivized producers and traders to redirect cargoes from Europe to Asia.
Japan and South Korea, which account for the bulk of global LNG demand, have borne the brunt of rising prices.
The Domestic LNG Picture
Many prospective US liquefaction schemes involve the addition of export capacity to existing import-only facilities, reducing construction costs relative to projects in Australia and offshore East Africa.
BG Group has estimated the cost savings associated with these brown-field projects at as much as 50 percent; the liquefaction facility will be able to take advantage of existing land, tanks, process equipment, jetties and utilities.
However, a growing backlog of proposed LNG export projects and petrochemical capacity on the Gulf Coast could strain the labor market and lead to cost inflation later this decade.
And whereas the majority of existing LNG export facilities exploit a specific basin, US liquefaction sites would draw their volumes from a wide range of producers and basins, reducing exploration and development risks.
Investors often assume that the government remains the primary impediment to US producers and international consumers taking full advantage of the spread between domestic natural-gas prices and prevailing levels in international markets.
Brown-field facilities that contemplate adding liquefaction capacity to existing import terminals face fewer impediments to securing FERC approval relative to green-field proposals in the Pacific Northwest, where environmental opposition is strong.
http://seekingalpha.com/article/2255873-outlook-for-u-s-lng-exports
Veresen One trick pony in Oregon?
https://www.google.com/finance?q=TSE:VSN&ei=G0eTU8CTOM7HqQHjoYHoDA
ShawCor Long term infrastructure play?
https://www.google.com/finance?q=TSE:SCL&ei=BEiTU_ioD87HqQHjoYHoDA
Macro Enterprises Speculative Pipe line play?
https://www.google.com/finance?q=CVE:MCR&ei=BEiTU_ioD87HqQHjoYHoDA