A slimmed down musing for the week, but some information to consider.

There are many differing points of view about the tight oil and shale gas “revolution” such as whether it will be long or short-lived or whether it’s a game-changer for US energy independence and spells the end of OPEC or the whole 100 year gas supply and all sorts of similar hyperbole. That is a discussion/debate for another day. What is undeniable though is the unprecedented amount of capital that has been poured into what is an expensive to produce resource play and that loose monetary policy and near zero interest rates have meant that a large proportion of that capital has come in the form of debt, often out of all proportion to what is normally deemed prudent and chasing what can only be described in many cases as hype.

An important question to ask in light of that investment is what kind of return is being generated. A recent summary of financial results prepared by Labyrinth Consulting Services from corporate SEC filings for a broad basket of tight oil and gas players paints what can only be described as a frightening picture.

In this summary, the financial results of this representative basket of 19 tight oil and 22 shale gas companies was aggregated and shows that they generated negative Free Cash Flow (FCF – the cash available for distribution to shareholders after giving effect to operations, capex, taxes, investment in working capital and financing activities) in 2014 and 2013 and carried a large and expanding amount of debt. Specifically:

In simple terms, for the fiscal years in question, these companies were losing huge amounts of Free Cash Flow and funding their exploration with newly raised capital well before the commodity price collapse. Regardless of how efficient these producers were becoming (a common thread of discussion), the capex intense nature and rapid decline rates of these plays raises legitimate questions about how sustainable it all would be if money wasn’t for all intents and purposes free and seemingly unlimited. Never mind the fact that if Bernie Madoff was selling it, you would be unlikely to buy.

With the spectre of the Fed raising rates and reserve write-downs leading to bank covenant issues, a lot of these companies will be in a fairly tight spot over the next few quarters which is why so many are currently raising equity or looking for private equity partners to pay down debt – replacing cheap money they can’t hope to repay out of cash flow with increasingly expensive risk capital and diluting existing shareholders. Notwithstanding $60 oil and the “fracklog”, the law of averages says not everyone can survive.

Prices as at May 29, 2015 (May 22, 2015)

• WTI Crude: $60.24 ($59.92)
• Nymex Gas: $2.651 ($2.887)
• US/Canadian Dollar: $0.8034 ($ 0.8129)

Highlights

• The price of oil slid during the week on U.S. dollar strength before recovering towards the end of the week on rig count numbers.
  • Storage declined more than expected
  • Production increased during the week as Alaska production recovered and lower 48 production posted a surprise increase
  • The rig count continued to fall
• Natural gas lost ground during the week on cooler weather.
• As of May 22, 2015, US natural gas in storage was 2101 billion cubic feet (Bcf), which is 0.8% below the 5-year average and about 54% higher than last year’s level, following an implied net injection of 112 Bcf during the report week.
• As at May 22, 2015, US Crude oil supplies were at 479.4 million barrels, a decrease of 2.8 million barrels from the previous week and 86.4 million barrels ahead of last year.
• The number of days oil supply in storage was 29.5, ahead of last year’s 24.8.
• Production increased to 9.596 million barrels per day from 9.262, with the increase coming from both Alaska crude and lower 48
• Oil rig count was down to 646 from 659 the week prior, the lowest since August 2010
• Natural gas rigs drilling in the United States increased this past week to 225 from 222.
• As of May 25, the Canadian rig count was up to 96 (13% utilization) (54 Alberta (10%), 14 BC (17%), 28 Saskatchewan (22%)). Typical utilization for this time of year is about 20%.

Drillbits

• Aveda Transportation and Energy Services Inc has agreed to purchase Hodges Trucking Co, an operator and owner of rig moving and heavy haul equipment based in Oklahoma City, Oklahoma. The deal, estimated at between $100 million and $150 million is significant in that it is one of the first Canadian energy services deals of significant size to occur in this fiscal year
• Crescent Point announced a purchase of Legacy Oil & Gas for $1.53 billion, a deal that solidifies its dominance in Saskatchewan
• OPEC meets on Friday June 5 to review its current production quotas. No change is expected however there is sure to be significant media volatility in the run-up to the session.
• Annualized US and Canadian Q1 GDP figures released today show the effect of the oil price slump at -0.7% and -0.6% respectively.