CONDITION RED: Fracking Shale Is Destroying Oil & Gas Companies Balance Sheet

Courtesy of SRSrocco report:

There is this huge myth propagated by the MSM as well as several of the well-known names in the alternative analyst community about the wonders of SHALE ENERGY. I can’t tell you how many readers send me articles from some of these analysts stating how the United States will become energy independent while pumping some of these shale energy stocks.

Nothing has changed in America….. there’s always another sucker born every minute.

I am not going to mention the names of the two top alternative analyst organizations, but one rhymes with Lansberry and the other is headed by a gentlemen who doesn’t believe in gold and silver manipulation. You fill in the blanks.

It is extremely frustrating to see the continued GARBAGE called analysis on the SHALE ENERGY INDUSTRY. I have written several articles listing the energy analysts that I believe truly understand what is taking place in U.S. energy industry. They are, Art Berman, Bill Powers, David Hughes, Jeffrey Brown and Rune Likvern.

Art Berman did a great presentation last year in front of the Houston Geological Society, stating THE U.S. SHALE GAS INDUSTRY IS A COMMERCIAL FAILURE. Art provides some excellent data to back up that accusation. So, I recommend watching that presentation at the link above.

Now… if Art was wrong, why would we have this article written by Wolf Richter, Where Money Goes To Die: How Fracking Is Blowing Up The Balance Sheets Of Oil & Gas Companies:

Based on data compiled from quarterly reports, for the year ending March 31, 2014, cash from operations for 127 major oil and natural gas companies totaled $568 billion, and major uses of cash totaled $677 billion, a difference of almost $110 billion.

To fill this $110 billion hole that they’d dug in just one year, these 127 oil and gas companies went out and increased their net debt by $106 billion. But that wasn’t enough. To raise more cash, they also sold $73 billion in assets. It left them with more cash (borrowed cash, that is) on the balance sheet than before, which pleased analysts, and it left them with a pile of additional debt and fewer assets to generate revenues with in order to service this debt.

It has been going on for years. In 2010, the hole left behind by fracking was only $18 billion. During each of the last three years, the gap was over $100 billion. This is the chart of an industry with apparently steep and permanent negative free cash-flows:


This is the huge problem with Fracking shale oil and gas. Due to the extremely high annual decline rates of the typical shale oil or gas well, companies must continue to spend a great deal of capital expenditures to replace what was lost. It’s known as the DRILLING TREADMILL…. once you start, you can’t get off.

As the article states, in one year the top 127 oil and gas companies spent $110 billion more on capital expenditures than they received from operations. So, they acquired $106 billion in additional debt (a large percentage through the Junk Bond Market) and sold assets to make up the difference.

Note: I did use part of Wolf Ricter’s title in my article because it was one of the best titles I have seen on this industry in a long term. He gets the credit.

This is not a sustainable business model, just like the same nonsense taking place in the broader stock markets as corporations buy back massive amounts of their stock to give the ILLUSION that everything is fine and BAU- Business As Usual will continue.

Not only are many of these oil and gas companies hiding the fact that their balance sheets are hemorrhaging debt, they also have a cozy situation with the Federal Government. Basically, the Fed’s allowed them to defer more than half of their tax bill… and its a lot of money.

According to these recently released report, Effective Tax Rates of Oil & Gas Companies: Cashing In On Special Treatment:

According to their financial statements, 20 of the largest oil and gas companies reported a total of $133.3 billion in U.S. pre-tax income from 2009 through 2013. These companies reported total federal income taxes during this period of $32.1 billion, giving them a federal effective tax rate (ETR) of 24.0 percent. Special provisions in the U.S. tax code allowed these companies to defer payment of more than half of this tax bill. This group of companies actually paid $15.6 billion in income taxes to the federal government during the last five years, equal to 11.7 percent of their U.S. pre-tax income.

Occidental Petroleum reported a total federal income tax bill of $5.4 billion from 2009 to 2013, of which it deferred payment of $4.5 billion, or 83 percent. Continental Resources deferred $1.1 billion of its $1.2 billion in total federal income taxes.As a result, most of the companies accumulated large amounts of deferred tax liabilities during this period.

In a nutshell, the top 20 oil and gas companies still owe $16.5 billion (more than 50%) to Uncle Sam in tax revenue.

Because many of these companies are busy BLOWING THRU CAPEX to continue the drilling treadmill, they do not have the surplus cash to pay their required taxes. Which means, if they were forced by the Govt to pay their taxes, they would have to borrow EVEN MORE MONEY to do so.

Now… you won’t see this information included in the analysts’ reports put forth by the organizations pushing these energy stocks. Do these analysts actually believe the U.S. will become energy independent on the back of these energy companies that are saddled with debt and do not have the ample cash to pay their taxes?

Evidence Of Peak Shale Gas Is Already Here

As the propaganda of U.S. energy independence continues, there is already evidence showing a peak in shale gas production. Early on, the Haynesville and Barnett shale gas fields ramped up production considerably. If we look at the chart below, we can see this just how rapidly production increased.


The Barnett shale gas field in Texas increased production steadily until 2009, then it fell off a bit and recovered higher by the end of 2011. The Haynesville came online in 2008, and went gang-busters by increasing its production substantially until the end of 2011.

However, with the average cost of production much higher than the spot price of natural gas, production at the Haynesville peaked and declined rapidly in the next few years. Art Berman stated in his presentation linked above, that only 6% of the Haynesville is commercial at a $6 natural gas price. Hell, most of the shale gas at the Haynesville was extracted at prices between $2-$4.


At the end of 2011, beginning of 2012… these two shale gas fields were producing 12 billion cubic feet of natural gas per day (Bcf/d). Now, their combined total is a little more than 8 Bcf/day — a staggering 33% drop in just 2 years.

So, how is the U.S. able to continue increasing its total natural gas production? Well, that’s mostly due to the MIGHTY MARCELLUS. If you thought the Barnett and Haynesville had a rapid increase in shale gas production, take a look at the Marcellus chart below:


The Marcellus didn’t really start serious production until 2010. In the beginning of 2010, the Marcellus produced 0.5 Bcf/d of shale gas and from the latest data released by the EIA – U.S. Energy Information Agency, hit a new record of 13.7 Bcf/d in June.

Just look at that chart…. it’s nearly an exponential increase. Anyone with a little understanding of math will realize the production increase shown in chart is not sustainable. At some point the Marcellus will peak and decline in the same fashion as did the Haynesville.

While it is true that the decline could be slowed down by continued drilling… it may only be possible at much higher prices.

In my previous article, THE UNKNOWN FACTOR: How The Global Financial System Will Collapse, it explained how Energy and the Global Financial System are co-dependent and are now in a very fragile state. I included an excellent video presentation by Roger Boyd who made this very easy to understand.

The problem that most investors and analysts fail to realize is that Americans and most of the world cannot afford expensive energy. The only reason we are able to purchase this expensive energy is due to the Fed’s Low Interest Rate Monetary Stimulus Policy.


The Global Financial System needs continued monetary stimulus so that the public can afford to pay high energy prices while the Shale Energy Industry needs continued borrowing at low rates to finance its massive debt enabling it to supply oil and gas to the market. Both of these conditions ARE NOT SUSTAINABLE.

When one of the LEGS of this fragile system is pulled, the whole thing comes crashing down…. instigating several Self-Reinforcing Feedback Loops.

What investors need to understand is that during bad recessions or depressions in the past, the EROI – Energy Returned On Invested in the oil and gas industry was very high… which means it cost a hell of a lot less to produce each new barrel of oil than it does today.

As I stated in many articles, the EROI of U.S. oil and gas in the 1930′s was 100/1, in 1970 it fell to 30/1 and is now approximately 10/1. This data is provided by David Murphy here at TheOilDrum.


(Plot of three estimations of EROI for U.S. oil and gas)

So, after the Great Depression, the U.S. energy industry could produce 100 barrels of oil for each barrel of oil consumed in the process. Which meant, we had the lots of CHEAP OIL to pull us out of the depression. On the other hand, Shale oil comes in at a WHOPPING 5/1 EROI. You can read more about Shale Oil EROI HERE.

Today, we don’t have cheap oil to pull us out of the huge mess we are facing as the Global Financial System is loaded with Debt, Derivatives and Fraud as far as they eye can see.

When the highly leveraged Global Financial System finally crashes, it will pull down the energy industry with it. Thus, a great deal of the supposed forecasted growth of oil and gas will no longer be commercially viable.

This will also destroy a great deal of the PAPER CLAIMS such as futures, options, derivatives and etc, leaving a mad dash for physical assets. Some think we will see Deflation… we may. However, I believe it will be DEFLATION in the value of paper claims with a huge RISE in the value of the physical asset.

It will be the disintegration of the 100 paper claims on gold and silver that will implode to zero, while the actual physical bullion will hit levels thought unimaginable.

When this occurs… remember my favorite line:



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