Monday, January 25, 2016

Vulture Capital via AEP--"Saudis ‘will not destroy the US shale industry’" noted in the Jan. 11 story on Arch Coal's bankruptcy: "Someone will be accumulating these assets."

From the Telegraph:
Energy guru Daniel Yergin says rich investors have $60bn war chest to buy up distressed fracking assets after Opec war of attrition

Hedge funds and private equity groups armed with $60bn of ready cash are poised to snap up the assets of bankrupt US shale drillers, almost guaranteeing that America’s tight oil production will rebound as soon as prices start to recover.
Daniel Yergin, founder of IHS Cambridge Energy Research Associates, said it is impossible for OPEC to knock out the US shale industry though a war of attrition even if large numbers of frackers fall by the wayside over coming months.
Mr Yergin said groups with deep pockets such as Blackstone and Carlyle will take over the infrastructure when the distressed assets are cheap enough, and bide their time until the oil cycle turns.
“The management may change and the companies may change but the resources will still be there,” he told the Daily Telegraph. 
“It takes $10bn and five to ten years to launch a deep-water project. It takes $10m and just 20 days to drill for shale,” he said, speaking at the World Economic Forum in Davos.

In the meantime, the oil slump is pushing a string of exporting countries into deep social and economic crises. “Venezuela is beyond the precipice. It is completely broke,” said Mr Yergin.
Iraq’s prime minister, Haider al-Abadi, said in Davos that his country is selling its crude for $22 a barrel, and half of this covers production costs. “It’s impossible to run the country, to be honest, to sustain the military, to sustain jobs, to sustain the economy,” he said.

This is greatly complicating the battle against ISIS, now at a critical juncture after the recapture of Ramadi by government forces. Mr al-Albadi warned that ISIS remains “extremely dangerous”, yet he has run out of money to pay the wages of crucial militia forces.

It is understood that KKR, Warburg Pincus, and Apollo are all waiting on the sidelines, looking for worthwhile US shale targets. Major oil companies such as ExxonMobil have vast sums in reserve, and even Saudi Arabia’s chemical giant SABIC is already nibbling at US shale assets through joint ventures.

Mr Yergin is author of “The Prize: The Epic Quest for Oil, Money and Power”, and is widely regarded as the guru of energy analysis.

He said shale companies have put up a much tougher fight than originally expected and are only now succumbing to the violence of the oil price crash, fifteen months after Saudi Arabia and the Gulf states began to flood the global market to flush out rivals.

“Shale has proven much more resilient than people thought. They imagined that if prices fell below $70 a barrel, these drillers would go out of business. They didn’t realize that shale is mid-cost, and not high cost,” he said.

Right now, however, US frackers are in the eye of the storm. Some 45 listed shale companies are already insolvent or in talks with creditors. The fate of many more will be decided over the spring when an estimated 300,000 barrels a day (b/d) of extra Iranian crude hits an already saturated global market.

Shale hedges on the futures markets - a life-saver in the early months of the price collapse - are largely exhausted. IHS estimates that hedges covered 28pc of output in the second half of last year for the companies it covers. This will fall to 11pc in 2016.

The buccaneering growth of the shale industry was driven by cheap and abundant credit. The guillotine came down even before the US Federal Reserve raised rates in December, leaving frackers struggling to roll over loans. Many shale bonds are trading at distress level below 50 cents on the dollar, even for mid-risk companies.

Banks are being careful not to push them into receivership but they themselves are under pressure. Regulators fear that the energy industry may be the next financial bomb to blow up on a systemic scale. The Fed and the US Federal Deposit Insurance Corporation have threatened to impose tougher rules on leverage and asset coverage for loans to fossil fuel companies.

Yet even if scores of US drillers go bust, the industry will live on, and a quantum leap in technology has changed the cost structure irreversibly. Output per rig has soared fourfold since 2009. It is now standard to drill multiples wells from the same site, and data analytics promise yet another leap foward in yields.

“$60 is the new $90. If the price of oil returns to a range between $50 and $60, this will bring back a lot of production. The Permian Basin in West Texas may be the second biggest field in the world after Ghawar in Saudi Arabia,” he said....MORE