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Capital Flight Is Killing The US Shale Boom

Capital Flight Is Killing The US Shale Boom

Capital Flight

The growth in U.S. shale production is grinding to a halt as low prices put drillers in a financial vice.

The slowdown has been unfolding for much of 2019, but the latest slide in oil prices is another blow to cash-strapped companies. Share prices for many E&Ps are down sharply. For instance, Devon Energy’s stock is down 20 percent since mid-September; EOG Resources is off by 17 percent and Pioneer Natural Resources is down by more than 13 percent. Many other companies have seen similar declines.

Rig counts have fallen by 20 percent since last year, drilling is down, hotel rates are down, and employment is in decline. “If you can’t wring out any costs savings then you’ve got to buy less stuff if you want to get your costs down, and that’s the phase we’re entering into,” Jesse Thompson, senior business economist at the Houston branch of the Federal Reserve Bank of Dallas, told Bloomberg.

As Bloomberg noted, annualized employment grew only 0.7 percent through August, compared to 11.4 percent for the same period in 2018. The unemployment rate has ticked up from 2 to 2.3 percent. The number of fracking crews has fallen to its lowest level in 30 months.

For embattled shale drillers, there is another imminent hurdle that they must clear. For the first time since 2016, Permian shale drillers could see their access to borrowing slashed. Lenders periodically reassess the borrowing base that they offer to oil and gas producers, a so-called “credit redetermination” period.

According to a survey of financial institutions as well as oil and gas firms by law firm Haynes and Boone, the industry is set to see “a decrease in credit availability for producers and a strong interest in alternative sources of capital.”

In other words, lenders are turning off the spigots.

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