The fracked gas industry's long borrowing binge may finally be hitting a hard reality: paying back investors.
Enabled by rising debt, shale companies have been achieving record fracked oil and gas production, while promising investors a big future payoff. But over a decade into the “fracking miracle,” investors are showing signs they're worried that payoff will never come — and as a result, loans are drying up.
Growth is apparently no longer the answer for the U.S. natural gas industry, as Matthew Portillo, director of exploration and production research at the investment bank Tudor, Pickering, Holt & Co., recently told The Wall Street Journal.
“Growth is a disease that has plagued the space,” Portillo said. “And it needs to be cured before the [natural gas] sector can garner long-term investor interest.”
Hints abound that gas investors are no longer happy with growth-at-any-cost. For starters, several major natural gas producers have announced spending cuts for 2019.
Such pledges of newfound fiscal restraint are most likely the result of natural gas producers' inability to borrow more money at low rates.
As DeSmog has reported, the historically low interest rates following the 2008 housing crisis were a major enabler of the free-spending and money-losing attitudes in the shale industry. Wall Street has funded a decade of oil and gas production via fracking and incentivized production over profits. Those incentives have worked, with record production and large losses.
However, much like giving mortgages to people without jobs wasn’t a sustainable business model, loaning money to shale companies that spend it all without making a profit is not sustainable. Wall Street investors are now worried about getting paid back, and interest rates are rising for shale companies to the point that borrowing more money is too financially risky for them. And because they aren't earning more money than they spend, these companies need to cut spending.
CNN Business recently reported that oil and gas companies stopped borrowing money in October 2018, but not out of restraint. Instead, CNN wrote, “investors, fearful of defaults, demanded a hefty premium to lend to energy companies.”
The days of unlimited low-interest loans for an industry on a decade-long losing streak might be coming to an end.
As Bloomberg credit analyst Spencer Cutter explained to CNN: “Investors woke up and realized this was built on debt.”
Canada’s Natural Gas Market Facing 'A Daunting Crisis'
Prospects for natural gas don't look much better north of the U.S. border.
Like the Canadian tar sands oil market, the Canadian natural gas market is also in the midst of a long losing streak. The problems facing the natural gas market in Alberta, Canada, is “far worse than it is for oil,” said Samir Kayande, director at RS Energy, according to Oilprice.com.
Canadian natural gas producers are being crushed by the free-spending American companies that could produce records amounts of gas at a loss while using borrowed money.
One reason natural gas is so cheap right now is that fracking for oil in the U.S. ends up producing huge amounts of gas at the same time. This gas that comes out of the wells with the oil is known as “associated gas.” And it is so plentiful that in places like the Permian Basin in Texas, the price of natural gas has actually gone negative.
Paying someone to take the product that a company spent money to produce is not a sustainable business model.
Additionally, the U.S. oil and gas industry chooses to flare large amounts of natural gas in oil fields because it's cheaper than building the necessary infrastructure to capture it — literally burning its own product instead of selling it.
And the Canadian producers, who used to sell gas to the U.S. market, simply can’t compete.
A natural gas advisory panel to Alberta’s energy minister addressed the crisis for Canadian natural gas producers in the December 2018 report “Roadmap to Recovery: Reviving Alberta’s Natural Gas Industry.” The report’s opening line summarizes the problem:
“Traditional markets for Alberta natural gas are oversupplied. Prices, and therefore industry and government revenues, are crushingly low and have been increasingly volatile locally since the summer of 2017.”
Noting the dire situation, one natural gas executive predicted that “this will only get worse in 2019.”
Too much supply, not enough demand.
To remedy this problem, the report recommended expanding supply, decreasing regulation, and bailing out companies with financial backing from the government, with the ultimate goal of producing more gas and exporting it to Asia.
The forgotten commodity: #NaturalGas, #Alberta— Evin Enry (@TulliiLLC) February 1, 2019
Western Canadian natural gas markets that have faced weak prices for more than a year. Importantly, what actions can be taken to fix the market?https://t.co/ArXPDMTctO
With Alberta’s reliance on oil and gas to support its economy, it is easy to see why its politicians are loathe to recognize the economic realities of the natural gas (and tar sands oil) industries.
However, some politicians feel the same way about the American coal industry, and that is dying primarily because renewables and natural gas are cheaper ways to produce electricity.
Desperate Times for Leading Gas Producer
Chesapeake Energy is often held up as a case study for the fracking boom. It was a huge early financial success story (based on its stock price, not actual profits), and in 2008, its then-CEO Aubrey McClendon, known as the “Shale King,” was the highest paid Fortune 500 CEO in America.
Since those high times, it has been a rough decade for Chesapeake. The stock price is near all-time lows — where it has remained for years.
Chesapeake has stayed afloat by borrowing cash and currently owes around $10 billion in debt. Unable to make money fracking gas in America since the days of the Shale King, Chesapeake has a new strategy — fracking for oil.
The Wall Street Journal recently reported this shift in Chesapeake's strategy, referring to it as “ill-timed” and “straining already frayed finances.”
But Chesapeake is all-in on this new strategy. According to The Wall Street Journal, Chesapeake CEO Doug Lawler said the company “plans to dedicate at least 80 percent of 2019 capital expenditures to oil production because it sees crude as the key to a more profitable future.”
One of the top gas producers in America and a “fracking pioneer” is abandoning fracked gas as a path to a profitable future. The fact that Chesapeake now believes fracking for oil is a path to a profitable future — despite all the evidence to the contrary — gives this move an air of desperation.
While U.S. politicians from both parties have given standing ovations for the U.S. oil and gas industry, investors appear to be losing their enthusiasm. The so-called shale revolution, the fracking miracle, may have resulted in record oil and gas production in North America, but the real miracle — in which shale companies make money fracking that oil and gas — has yet to occur.
Fascinating new study: going 100% renewable is the cheapest way to power North America. https://t.co/bA1yfn652n— Bill McKibben (@billmckibben) February 7, 2019
The North American natural gas industry is facing a crisis with an oversupplied market and producers that are losing money. Those producers desperately need higher natural gas prices.
However, higher gas prices mean renewables become even more attractive to investors, which may lead to gas following in the footsteps of coal — dying at the hands of the free market.
It may take some time, but eventually investors wake up — or run out of money.
Follow the DeSmog investigative series: Finances of Fracking: Shale Industry Drills More Debt Than Profit