US oil drillers going bankrupt; OPEC strategy a winner?

The US sanctioning its own oil export was big news. The forces behind that export-readiness were the shale-drilling industry.

High oil prices in the last decade encouraged huge investments in the shale industry in the US. 

The industry employs a high-cost method called hydraulic fracturing to break up shale rock to release oil and gas.

It enjoyed good times when oil price was above US$100, but the recent crash to near US$30 levels has pushed shale oil to difficult times.

The latest oil rig count, which measures the number of active rigs exploring or developing oil or natural gas, released by Baker Hughes says that the US rigs are coming down very fast.

“The average US rig count for December 2015 was 714, down 46 from the 760 counted in November 2015, and down 1,168 from the 1,882 counted in December 2014,” the company said while releasing the count.

This fall in the number of rigs was expected.

DT News was told last year by one of the leading providers of software solutions to the US oil and gas industry that the industry needed an oil price above US$75 to be profitable. This inference has been agreed by most of the analysts covering the industry, with a few saying that US$60 is a more accurate figure.

Now reports are emerging that the US producers are facing tough financial environment due to the unexpected fall in oil price. 

An estimate by Oppenheimer & Co says that more than half of the industry will go bankrupt in less than two years.

Another report published by Haynes and Boone, in its Oil Patch Bankruptcy Monitor, says that dozens of oil and gas producers in North America have filed for bankruptcy protection. The size of the debt involved amounts to US$17 billion.  More oil exploration and production companies will be filing for bankruptcy protection in 2016, the legal firm added.

Analysts are reminiscing about the 1986 oil crash, during which 25pc of exploration and production companies went bankrupt.

“Half of the current producers have no legitimate right to be in a business where the price forecast even in a recovery is going to be between, say, $50 and $60. They need $70 oil to survive,” Fadel Gheit of Oppenheimer told CNBC.

The steep decrease in the US rig count and the spike in bankruptcy filing has sent shivers down the industry, analysts note.

Earlier, investors and the financial sector supported the US shale industry, but now the companies are mostly left to fund their operations from own cash flow, which is already in a deeply negative territory. 

Oilprice.com says ‘Oil and gas sector bankruptcies have reached quarterly levels last seen in the Great Recession.’

A recent Reuters report points out that even though companies might be able to pay interest on their loans, it will be difficult for them to drill new wells.  Many companies had restructured their loan books, replacing loans maturing shortly with new loans.

The OPEC strategy of not cutting production may have sounded a deadly blow to the US shale energy industry, a fact that could help oil prices in the coming years. 

Low rig-counts as well as increased bankruptcies are early signs of consolidation, analysts say.