Deep The Denial

This is a bait ball. The school of mackerel in this photo believe there is safety in numbers and will stay schooled up like this even in the presence of predators. When attacked a few will survive, most won't.

I liken this image to the sort of "group think" that is currently associated with the US shale oil phenomena. People directly associated with it, who work for it, or service it, or lend money to it, all believe we have 50 years of shale oil reserves and that its horrendous costs, total lack of profitability and its massive debt loads are simply to be ignored. I cannot tell you how many times I have been told that if the shale oil industry was not making money, it would not be drilling all those wells.

The shale industry does not address it's debt, of course, but remarkably neither does the main stream media, or so called, analysts. Eleven million BOPD and America now becoming the number one producer in the world is a great accomplishment, so they think, and how we are achieving that level of production does not matter. That's group think.

I recently put somebody very smart on the necessary research (SEC K's, press releases regarding private equity to private producers, etc.) to determine what total upstream shale oil debt actually is. We found it to be between $285-$300B, both public and private. Kallanish Energy Consultants recently wrote that there is $240B of long term E&P debt in the US maturing by 2023 and I think we should assume that at least 90 plus percent of that is associated with shale oil. That is maturing debt, not total debt.

If the FED raises its rates another 6 BP's, as it says it will thru 2019, I believe the weighted interest rates across the shale industry's loan portfolios will average something like 7.0%. Most shale oil companies have credit ratings below investment grade, pay a premium for money, are facing loan refinancing soon with questionable reserve assets and already have three mortgages on the same house, so to speak. "Mezzanine financing," they like to call it.

By year end 2019 I firmly believe the US LTO industry will then be paying over $20B annually in interest on long term debt.

Using its own self-touted "breakeven" oil price, the shale oil industry must then produce over 1.5 Million BOPD just to pay interest on that debt each year. Those are barrels of oil that cannot be used to deleverage debt, grow reserves, not even replace reserves that are declining at rates of 28% to 15% per year... that is just what it will take to service debt.

In other words, at the moment about 29% of total LTO production in America is used just to pay debt interest.

Using its own "breakeven" prices the US shale oil industry will ultimately have to produce 9G BO of oil, as much as it has already produced in 10 years...just to pay its total long term debt back.

Essentially the only chance it has of doing that is if oil prices go to $115-125 a barrel, and stays there for a very long time. A debt-ridden world can no longer cope with even $100 oil; Bob Dudley with BP is recently quoted as saying "$80 oil is bad for the world." The IEA is already cutting its demand estimates for 2019. Household debt in America has never been higher. JP Morgan believes there is a better than 60% chance we will see a major worldwide recession in two years. Most of this shale oil debt, in my opinion, is going to be virtually impossible to ever pay back. In the mean time the LTO industry continues to outspend revenue and borrow more money.