The End of US Shale Oil Revolution?

As of today (2nd April 2020), Whiting Petroleum Corp (WLL) has filed for Chapter 11 bankruptcy, the first publicly traded casualty of crashing oil prices due to the ongoing oil price war between Russia, Saudi Arabia and OPEC. Based on previous analysis, the bankruptcies of US oil companies at current oil price levels are inevitable with the US oil industry primed for more defaults in the coming months.

Background

It is important to note that the defaults on US junk bonds (for oil and gas) have also been on the rise in the past few years. In 2019, energy junk bond defaulted rates were at 9.5% and total bankruptcy filing percentage from oil & gas is at 24%. In the US energy sector alone, a total of 18 billion in debt will mature 2 months from now.

With the US energy sector experiencing an already deteriorating market, the current downside pressure on supply and demand will undoubtedly bring trouble to the industry. Oil prices (WTI) are currently around $21 per barrel, down 65% since the start of the year. This is largely due to oversupply from the ongoing oil price war as well as weakening demand from the economic impact of Coronavirus outbreak.

US Energy Companies

The table below shows the average breakeven prices of large-cap, mid-cap and small-cap US oil companies, as well as their respective average cash/debt position. We can observe that at current oil prices, most companies are losing money from selling oil due to their significantly higher breakeven price (per barrel of oil). We also see that their cash and debt positions are not equipped to handle long term losses, as these companies would either need to refinance their debt positions or raise capital to cover their outflow.

Whiting Petroleum Corp

Whiting Petroleum’s market capitalization has shrunk to $32 million from as much as $15 billion at its peak in 2011. Despite the extremely poor performance, Holly, who was the executive vice president has collected $4 million in salary and bonuses (annually) since then. He’s also received pay-outs of stock that have plunged in value. This is estimated that their break-even price was 70 per barrel. It seems like they have been losing revenue since the end of 2015.

As of 31st Dec 2019, Whiting had $2.8 billion in debt and more than $585 million In cash on its balance sheet. Share price from 2018-2019 had slumped 85% from $53 to $8 and dipped by 90% to 37cents (most recently). Days before the shale oil producer filed for bankruptcy Whiting Petroleum Corp.’s board approved $14.6 million in cash bonuses for top executives days. Chief Executive Officer Brad Holly will collect $6.4 million of the total, which will be “paid immediately”.

Whiting’s bankruptcy brings the trailing 12-month high-yield energy default rate to more than 11%, and the year-end figure could ultimately surpass the 19.7% level set in January 2017, according to Fitch Ratings.

What’s to come

Based on existing models, at current crude oil price levels, the US oil industry is primed for more defaults in the coming months. Unless there is some sort of government intervention or immediate relief of depressed oil prices, we could potentially see the end of US oil industry’s dominance in the global oil markets.