Massive bankruptcies & $300 BILLION in write-downs coming for US shale

Covid-19 has created challenging conditions for global energy markets, and the US shale industry is facing “a great compression” that will result in huge losses in the first half of this year, accounting firm Deloitte says.

Although shale oil production has shown tremendous growth over the past five years, it has failed to make money for the industry in aggregate. Over the last decade, the once booming sector faced nearly 200 bankruptcies, registered “net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital,” Deloitte said in its report.

The analysts warn that the worst is yet to come, as unprecedented conditions – low commodity prices, reduced demand, capital constraints, debt loads, as well as the health impact of the coronavirus outbreak – have affected the oil market this year. As all of these processes are occurring simultaneously, it leads to a higher risk of technical insolvencies, analysts predict.

“Challenging oil market conditions could prompt the shale industry to impair or write-down the value of their assets by as much as $300 billion—with significant impairments expected in Q2 2020,” the report reads.

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US oil dominance is coming to an end

As shale oil production is more costly than the production of conventional crude oil, the recent market rout has become another blow for the industry. The collapse of the previous deal between major oil exporters combined with falling demand for the commodity as the result of the pandemic sent oil prices to new lows in April, with WTI May futures even dropping below zero.

While the oil market has rebounded since then, such intense volatility “highlights the fragile state of the industry,” according to Deloitte. The situation led to investor disenchantment with the sector as they shun shale stocks.

According to the firm’s calculations, about 30 percent of the major listed US shale operators are “technically insolvent” with oil prices at $35 per barrel. If the prices for the commodity average around $20, around half of those companies could go bust.

However, the economic fallout of the coronavirus outbreak is expected to extend beyond the US shale industry. Deloitte says that any major developments in US shale “will likely have a domino effect” on the global oil and gas industry, which has been under tremendous pressure this year.

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