Interest Costs Threaten Shale | Russell T. Rudy Energy LLC
There is a time honored saying that “Leverage is a two-edged sword; it makes good times look better, and bad times look worse.” According to a recent article in “World Oil”, this has never been truer than in the case of the shale revolution. The very debt financing that enabled many shale operators to develop shale plays and fuel the enormous increase in domestic oil production, is now threatening their financial survival.
Shale operators are devoting an ever increasing portion of their revenues to interest payments. Continental Resources, the primary player in the Bakken shale, spends almost as much on debt service as ExxonMobil, a company 20 times its size. Even worse, Continental is much more fortunate than its smaller brethren. Its bonds are considered investment grade which means it can borrow at lower interest rates than smaller companies. 27 of the 42 companies in the Bloomberg Intelligence North American Independent Exploration and Production Index have outstanding bonds rated as speculative or “junk” status. Consequently, many of them are paying interest rates of over 10 percentage points above the U. S. Treasury bond rate.
The implications for the future are not promising. As crude prices collapsed, operators cut capital spending which in turn will eventually result in reduced production. In fact, the U. S. Energy Information Administration predicts that oil production will begin to fall this month, and continue to do so through the end of this year. With reduced production, and fixed interest expenses, an ever increasing portion of revenue will be required to service debt. This has led many industry observers to conclude that the worst is yet to come.
To read the article in its entirety, please go to http://www.worldoil.com/news/2015/6/19/next-threat-to-us-shale-interest-expense-on-235-billion-debt .
