Will The Red Ink Ever Wash Out Of The U.S. Shale Gas Industry?
The U.S. shale gas industry has never been more active and more productive, feeding ever-increasing demands here. At the same time, though, the industry is awash in red ink, namely because the price of the commodity remains low. It’s the ultimate paradox — that an industry is spending more on drilling than it has realized from selling shale gas.
The Sightline Institute along with the Institute for Energy Economics and Financial Analysis investigated and found an “alarming volume of red ink.” Simply stated, free cash is a sign of economic health — the ability to pay down debt and to keep the operations going. An absence of positive cash flow means that companies have to dip into their reserves or seek financing from debt and equity markets. And those risk takers are holding back. The outlook?
Exxon Mobil Corp. and Chevron Corp. are diversified geographically and tend to have broader portfolios, all in an environment in which natural gas prices are at $2.54 per million Btus and future prices not much different. If the smaller and independent producers can’t hang on, then that leaves this potentially lucrative business venture to those with deep pockets. Calls seeking comment from the Independent Oil and Gas Producer’s Association and the Colorado Oil and Gas Association were ignored.
Here’s what Sightline and the energy institute had to say: “Frackers’ persistent inability to produce positive cash flows should be of grave concern to investors. A healthy industry would generate enough cash, not only to sustain its own capital spending, but also to pay off debt and reward stockholders— all while maintaining or even increasing its output to support rising stock prices.
“Until fracking companies can demonstrate that they can produce cash as well as hydrocarbons,” they continue, “cautious investors would be wise to view the fracking sector as a speculative enterprise with a weak outlook and an unproven business model.”
The two think tanks looked at a cross-section of 29 fracking-focused oil and gas companies, which in the first quarter of this year reported $2.5 billion in negative free cash flows. In the fourth quarter of 2018, those same companies recorded $2.1 billion in negative cash flows, they said. From 2010 through early 2019, the companies they surveyed racked up aggregate negative cash flows of $184 billion, they added — similar to what the International Energy Agency found: $200 billion negative free cash flows between 2010 and 2014.
“Oil and gas companies have raised little new money from equity and bond markets since last fall even though the oil and gas sector faced a wave of debt refinancing by the end of the year,” the Sightline and energy institute said.
The negative cash flows are occurring despite the fact that the United States continues a production boom. Global natural gas production increased by 190 billion cubic meters in 2018, or 5.2%, says BP, in its statistical review. Almost half of this out came from the United States, or 86 billion cubic meters, driven by shale plays in the Marcellus, Haynesville and Permian. That is the largest annual growth seen by any country in history, it adds.
Natural gas consumption, meantime, rose by 195 billion cubic meters in 2018. So where is this resource going? BP says that the main actor here is the United States, accounting for almost 40% of global demand growth and over 45% of the increase in production.
“Although some of the increase in U.S. gas supplies was used to feed the three new U.S. LNG trains which came on stream last year, the majority was used to quench the thirst of domestic demand,” says Spencer Dale, group chief economist for BP. LNG refers to liquefied natural gas, which is frozen gas discovered in the United States and shipped overseas — another potentially lucrative product line.
All this begs the question about which players within the oil and gas industry will make it in this environment. While the larger oil companies have distinct advantages — they can fund development by essentially writing a check and avoiding the capital markets — the smaller ones may be seeking revenue streams from natural gas liquids.
That is, the ethane, propane and methane are captured and then resold to manufacturers, allowing producers to get more bang for their drilling buck. Those natural gas liquids serve as the foundation for nearly all consumer products. And if producers can get a premium for them, the endeavors may eventually make economic sense.
The U.S. Energy Information Administration says that natural gas liquid production will grow by 32% between 2018 and 2050.
Moreover, the demand for natural gas will continue to grow not just to fuel electric utilities but also to potentially drive more vehicles. It may be cheaper to convert corporate fleets to run on compressed natural gas than to continue to use oil. It’s also a cleaner option.
Natural gas producers may see a bright future but they have to survive an ominous present — that they are drilling for ever-more resources but they are continuing to sell at prices in which they are running negative cashflows. While the big companies can endure, the smaller, independent ones need to win new financing and to find new business strategies.