Have you noticed the absolute carnage taking place in the U.S. shale oil stocks? It seems as if Wall Street and investors are finally growing weary of an industry that hasn’t made money in the past decade. Unfortunately, it took a longer than I expected, but the shale stocks have significantly underperformed the price action by the major oil companies. Now, when I say, “underperformed,” wait until you see the numbers.
Of course, the bloodbath taking place in U.S. shale stocks shouldn’t be a surprise as the WARNING SIGNS have been many. For example, this article back in February, Wall Street Loses Faith In Shale, stated the following:
To Wall Street, the shale industry has lost a lot of its allure. A decade’s worth of promises have failed to materialize, and Big Finance is cutting some of its ties with smaller shale drillers who have not delivered.
The Wall Street Journal reports that the shale industry only saw $22 billion in new bond and equity deals, down by more than half from 2016 levels, which was a much worse time for the market.
The steep decline in new debt and equity issuance is a sign that major investors are no longer rushing to finance unprofitable shale drilling. It’s worth noting that this is a new development. For years Wall Street financed unprofitable drilling, holding out on the promise that rapid production growth would eventually pay off.
So, it seems as if investors are no longer willing to finance the U.S. Shale Oil Industry Black Hole. And why should they? One of the largest shale players in the Permian, Pioneer Resources, suffered its eighth consecutive year of negative free cash flow. In 2018, Pioneer spent $541 million more on capital expenditures than it made from cash from operations and if we add up all the eight years, it’s a grand total of $6.8 billion in negative free cash flow.
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