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The Warning Signs Are Flashing for U.S. Shale

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The Warning Signs Are Flashing for U.S. Shale

U.S. oil production growth has slammed on the breaks, as low prices and the loss of access to capital markets has forced a slowdown in drilling.

Third quarter earnings reports will soon start to trickle in. Three months ago, the shale industry saw improvement in some of the headline cash flow figures, but the second quarter results also revealed some deeper concerns about drilling operations and raised questions about the longevity of an unprofitable oil boom.

The problem for the shale industry is that, if anything, the outlook has only become gloomier since. Oil prices have languished and investors have grown more skeptical.

Ahead of third quarter earnings, some analysts downgraded several prominent shale drillers.

Imperial Capital analyst Irene Haas issued a double downgrade this week to Extraction Oil & Gas, a Colorado shale driller. Imperial Capital cut the company’s outlook to Underperform from Outperform, and lowered its price target to just $2 per share from $7. Extraction saw its share price plunge by 9 percent at one point during trading on Thursday before recovering some losses.

Irene Haas says that Extraction’s production is likely to be flat during the third quarter due to unplanned outages on the Western Gas system. More importantly, Haas says that Extraction’s business model is “fundamentally more risky, compared to other DJ Basin peers.” Haas also raised concerns about Extraction’s near-term fortunes, noting that the company “might not be equipped to weather additional commodity prices downdraft or operational upsets, planned or unplanned.” 

Meanwhile, SunTrust cut Concho Resources to Hold from Buy, pointing to the company’s efforts to rein in “inflated well costs.” The move also comes in the wake of Concho’s high-profile announcement over the summer, in which it admitted that its densely-packed 23-well “Dominator” project produced poor results.

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