Why $40 simply doesn’t add up for debt-laden US shale

Midland, Texas, is the beating heart of US shale production. In this part of the US, they know all too well what boom and bust feels like.

Last autumn when I was on the ground in the oil and gas fields of West Texas the industry was just starting to rebuild after two severe downturns in the last five years; the third is proving too much too bear.

Oil services company owner Bobby Bounds was all smiles during the boom. He and his dozen employees did industrial painting on storage tanks, pipes, valves, anything related to oil and gas in the giant Permian basin.

Then COVID-19 hit, striking first on Wall Street when markets cratered and in no time, Main Street in Midland felt the pain.

“I woke up. I think it was on a Monday and the Dow Jones had dropped 2300 points or something and it wasn’t 12 hours later, I’m getting phone calls from my big customers telling me to stop all work. And in one day I had lost hours of active jobs,” said Bounds.

A short-lived price war then broke out between Saudi Arabia and Russia, demand for crude dropped nearly 30 percent and prices went below zero for the first time in history, and so, too, did Bobby’s business.  All told he lost a million dollars of work. “I’m the entrepreneur, risk taker. I put resources at risk in hopes of a gain. And if I get some gain, but then it goes bad. Well, that’s bad for me. I see it as almost a gamble,” said Bounds.

In this high-stakes game of oil, he was forced to fold his hand and he packed his bags for neighboring New Mexico, where he started an industrial cleaning business. 

The health of the Permian basin is closely linked to what is called the active rig count, the wells currently being drilled to bring more energy assets to market. The tally is so important in this part of the US that it is updated daily on a big sign downtown.
In September 2019, the count was 860
nationally and 414 locally.  One year later, that figure hovered at 254 nationally and only 125 in the Permian.

The shake-out is in a word, radical. The US has already lost a whopping 3 million barrels a day of production, equivalent to taking a producer the size of the United Arab Emirates off the market.

The pain is spread evenly across the Permian. For example, Pioneer Natural Resources sits on the region’s largest oil and gas assets and has woken up to the reality, like many others in the US that expanding production at any costs just does not work.

“The world doesn’t need a million barrels a day of growth coming from the US. We’ll have to adjust our staffing levels down to right size it to our activity levels and we’re still in the middle of that process right now,” said Rich Dealy, CFO of Pioneer.

The Petroleum Equipment & Services Association estimates 103,420 jobs have been lost since the pandemic started.  That rise is reflected in the local unemployment rate, which has risen nearly five-fold in a year from just over 2 percent to 9.6 percent and in neighboring Odessa, it is the highest in the Lone Star state at 13 percent, according to figures from the Texas Workforce Commission. 

Corey Wood is one of those in search of a new job. After graduating from Texas A&M in 2017 with a degree in petroleum engineering, he worked briefly for oil and gas producer Lillis Energy. The company filed for Chapter 11 Bankruptcy in June, after prices collapsed and Wood was laid off. 

“I got a check when I walked out the door for my vacation days, that was just about it,” he said.

Wood’s living on unemployment and looking for a job. Despite the downturn, he is optimistic. He has had three interviews and is eager to stay in the energy industry. 

Texas and other oil-producing states are caught in a perfect storm that is leaving hundreds of companies in its wake — hit by Wall Street’s pressure for higher dividend payments and a big shift to renewable energy.

According to the International Energy Agency, investment in the oil sector will drop $1 trillion this year due to the pandemic. At this stage, money into solar, wind, nuclear and energy efficiency is running neck-and-neck with fossil fuels.  

Since the first big downturn in 2015, Pioneer Natural Resources started trimming its sails and it is not done yet, after posting a loss of over $400 million in the latest quarter.  

Other producers and oil services companies have been faced with a major shake-out. Over the last five years, 492 of them have gone bankrupt, with a debt load of $288 billion, according to Haynes & Boone, a law firm that tracks the industry’s ups and downs.

The pace of bankruptcies has levelled off going into the fourth quarter, but a new reality has set in — that demand may not snap back for a prolonged period due to the pandemic.

“It’s unknown at this point. It really depends on when we get a vaccine and what happens to demand. I would say kind of the earliest would be late 2020. But it could be 2021, and that could roll into 2022 and even a 2023 timeframe,” said Dealy. 

 

*  John Defterios is CNN Business emerging markets editor and anchor based in Abu Dhabi. Twitter: @JDefteriosCNN