Has U.S. shale oil entered a death spiral?
The bad news coming out of the shale oil fields of America could all be put down to slumping oil prices. That is certainly a big factor. But as investment professionals like to say, when the tide goes out, we all find out who’s been skinny-dipping.
The pattern of negative news from shale country is not just related to price, however. Oil production, it seems, is being overstated industry-wide by 10 percent and 50 percent in the case of some companies, according to The Wall Street Journal.
The CEO of one of the largest players in the industry, Continental Resources, predicted that growth in shale oil production could fall by 50 percent this year compared to last year. In reality, we should expect worse as the industry for obvious reasons tends to exaggerate its prospects.
The place where the damage to investors has become severe is in private equity firms who hold a large portion of the shale oil industry’s high-yield debt. The plan for the firms was always to unload the debt on somebody else when better opportunities presented themselves. But the firms overstayed their welcome and are having a hard time even finding a bid in the market for these bonds.
With the big Wall Street players now questioning the value of their existing investments in shale oil, the industry is finding it hard to raise money. Not a single bond sale has come off since November in an industry which must continuously raise capital to survive.
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