US onshore oil producers lost US$67 billion last year as oil prices crashed, leaving many struggling to survive after their equity values were wiped out.
The US government’s energy information administration, in a study of 40 publicly listed US oil companies, found that nearly half – 18 companies – suffered much more than the others because of the high debt load they carried and the low per-barrel margins they earned, characteristics of the “fracking” specialists that had boomed since 2010.
The EIA published the results of the study in its weekly report on Wednesday, saying that the high debt and low margin companies – which it calls the “high loss group” (HLG) – may not be able to bring their production back even if oil prices rise to levels that were previously profitable.
The financial constraints “may limit the borrowing ability of the HLG companies, which could constrain their drilling and completion activities and thereby limit their production activities”, the EIA concluded.
The US onshore sector – particularly the shale oil producers – have been closely watched over the past 18 months as a lead indicator for the industry.
The rise of US shale oil since 2010, with production doubling to near 10 million barrels per day, was one of the main factors that led to the world oil glut.
The US shale sector had at first seemed resilient and even continued to raise production through to last summer’s peak of about 9.6 million bpd.
But as Saudi Arabia held to its promise that it would fight for market share and let market forces drive out high-cost producers the financial pain deepened as oil price hedges expired and as financing dried up for a number of companies. Production started falling through the autumn and was below 9 million bpd in the two weeks through April 15, according to the latest EIA report.
That is the first weekly average below 9 million bpd since October 2014.
US onshore production accounts for slightly more than 80 per cent of US total output.
Offshore production has continued to grow over the past 18 months – by 400,000 bpd to more than 1.6 million bpd.
The 40 companies in the EIA’s study accounted for a total output of 2.6 million bpd, or about 35 per cent of total onshore production. The HLG accounted for 1.2 million bpd.
The EIA further noted that asset values for the HLG fell substantially more than the other producers – 21 per cent versus 6 per cent – implying that the quality of their proven reserves was much lower.
The decline in value of the oil on their books could in turn lead to further financial difficulties, the EIA said.
“Many oil companies that receive regular lines of credit from banks to meet short-term cash needs are subject to borrowing caps that are based on the value of expected cash flows from a company’s reserves,” the EIA noted.
“Many companies are currently undergoing a redetermination of their credit limits, and those with high leverage or lower-quality assets could face significant curtailment of their access to short-term credit that could in turn constrain their drilling and completion operations, with direct implications for their production from new wells in the near term,” it concludes.
In February, the consulting firm Gavin/Solmonese calculated that US oil company bankruptcies had increased nearly fourfold last year.
It is not just US companies – a Deloitte report estimates that more than one-third of publicly traded companies globally face bankruptcies if oil prices stay where they are.
amcauley@thenational.ae
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