Sunday, December 14, 2014

Fracking go broke

Because of its cost structure, the fracking industry is extremely vulnerable to an organized attack.  Now there is no way for me to know who, if anyone, is coordinating an attack on fracking but the collapse in oil prices has already claimed its first victim.  Keep in mind here that fracking has been funded by some high-rollers who expected hedge-fund sorts of returns.  Many actually believed the fracking hype—that it was a game-changer that would usher in a new era of oil plenty and USA energy independence.  How hyper-expensive wells that lose half their output in less than five years would accomplish that is a mystery that no one has ever explained to me.

What OPEC can accomplish with their low-price strategy is significant.  Not only can they drive those pesky frackers out of business, they can cause them to inflict such major losses on the investment community that the high-rollers will never return.  Of course, it isn't just the frackers that will lose out when oil heads below $60 / barrel.  Lots of producing nations will be losing money at that level.  So my guess is that these low prices won't last very long.

Yesterday, I was filling up at the local Costco.  The exit checker who stands near the gasoline price sign in the main store told me that prices had gone down twice just yesterday.  It was $2.29 for a gallon of unleaded at 5 pm.  After a nasty cold start to winter around here, temps had climbed well over freezing and there were patches of ground fog developing.  Between the low gas prices and the unseasonable warmth, it felt like I had fallen into an old movie.  Because low oil prices could also trigger another financial meltdown, I have seen this old movie before and am not crazy to see the rerun.  I did notice that the banksters were in Washington last week covering their butts in case of another 2008-style meltdown.  So enjoy the low gas prices because you probably will get nicked by the bailout.

Oil price collapse has claimed its first shale drilling company, and why this may not end well

by dash888  DEC 12, 2014

An Australian energy company, Red Fork Energy, has quietly fallen, a victim of the recent collapse in oil prices. While this company's home is an entire hemisphere away, its demise does indeed make a sound that will be heard in the United States.

Red Fork is a shale driller in the US and produces oil and gas. It is completely exposed to the US shale industry, an industry that happens to be unviable with the price of oil under $100 per barrel.

While the collapse of a foreign oil company may not unleash a river of tears from those who oppose shale drilling in the US, an examination of this company's finances, and many like it, deserves more than an uttered "good riddance."

Most players in the shale gas industry are heavily in debt.

"Their costs of production are a bit higher, they've only been in the game really for a few years so their debt structure is a little bit higher than other companies, more mature companies," he said.

"Those two things are really putting pressure on them so with the price where it is they're just not making any margin."

Red Fork's major lender, Guggenheim Corporate Funding, happens to be an American company, based in New York.

This article on Red Fork's bankruptcy lays out a major cause for concern:

"... if OPEC continues to flood the market, other shale gas producers were also at risk of collapse.

"So, now the price of oil is down where it is, the shale gas producers might find they are unable to service their debt, so there would be a lot of non-performing loans," Mr Strachan said.

"By some reports, $15 trillion of funds has been lent to this business, so it may well be in fact that it's not the oil companies that are in trouble, it's the banks.

In essence, what we have now is an already under-regulated shale drilling industry, highly leveraged with trillions of dollars in debt, facing a future ruled by the whims and desires of OPEC, which would prefer that it just die, and the demands of bankers. This is a formula for disaster. more

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