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The US Shale Industry: From Boom to Bust

As an investor into technologies that sell into the energy vertical, it is critical to understand the underlying fundamentals of the vertical itself.

sailboats run aground

In 2010, when I started investing into energy, the shale industry was prepubescent. Myriad funds were raised and hundreds of entrepreneurs set their sites on innovating here. I was concerned then and continue to be. If the underlying industry cannot generate nor expect future free cash flows, how can a startup that depends on that industry build long-term value? Read on and let me know your thoughts.

For years, the US shale industry was on a boom fueled by junk bonds from Wall Street. The industry was waning in 2019. In 2020, shale oil giants faced the perfect storm — COVID-19, failed OPEC+ talks, and relentless oil price wars came to a head. Then the US shale industry went from just barely hanging on (which we discussed last month) to a definitive bust. 

The bust has been a long time coming; COVID-19 just pushed the industry over the edge. According to a July 2020 article by Bloomberg, Haynes and Boone reported that gas companies reached over $300 billion in losses since 2010. And as Bloomberg reported, more than 230 North American oil and gas manufacturers that owe at the very least $152 billion in debts have filed for bankruptcy since the beginning of 2015. 

So the shale oil companies are going down hard, and as of August of 2020, it's not over. But make no mistake: the 2020 shale bust has been years in the making. For my take on the twisted tale of the US shale bankruptcies, read on.  

The US Shale Boom and the Shale Revolution

The foundations for the shale boom can be traced back to the 70s. But it wasn't until around 2000 that the US shale industry really started to take off. The success story of the US shale boom was fueled by such factors as favorable government policy, technological innovation, and the rise of private entrepreneurship. High natural gas prices in the 2000s played a par, too. And as the Balance reports, the US had rights to both private land and the minerals in that land. That was a major advantage.

Back as far as 2001, the US increased its investment in and production of shale oil to the point that it became known for its shale revolution. It became less dependent upon imports and arrived as a major global exporter. 

The New York Times places the official rise of the US shale revolution around 2008, when oil prices neared $150 a barrel. The revolution continued into the following decade, the NYT writes, while the US faced chronic energy shortages and was dependent on Saudi Arabia and unstable oil producers such as Venezuela and Nigeria.

As of 2012, some of the biggest shale players in the lower 48 included Bakken, Eagle Ford, Permian, Marcellus, Anadarko-Woodford, Granite Wash, and Niobrara. During 2012 alone, these top US shale companies spent a total of $54.3 billion on oil shale production

The US had become the largest producer of crude oil. The Energy Information Administration announced as much in 2018. To put things into perspective, US output of oil coming from onshore production in the lower 48 states rose from 8.8 million barrels per day in 2014 to 12.2 million barrels in 2019. According to the Balance, shale oil makes up more than a third of the lower 48 states' contemporary production of crude oil.

The Shale Oil Plunge: 2014-2016

You would think that so much oil production would reap equally huge profits, but it never happened. When the industry was shaken by a devastating price crash in 2014, producers had to lay off workers en masse.

Shale oil prices plunged dramatically between 2014 and 2016, going down as one of the largest oil price declines in modern history. In fact, the World Bank recorded that oil prices dropped 70% during that time. 

Going into Thanksgiving of 2015, NPR reported, gas was less than $2.00 a gallon in some places and oil was down to $20.00 a barrel. Older workers over 50 years of age who were the industry experts and had been around since the 80s or 90s were now losing their jobs. According to Haynes and Boone, more than 100 bankruptcies occurred between 2015 and 2016. However, oil prices started to recover in 2016, and Shale Mag, as well as others, say the boom picked up again. 

2017-2019: More Ups and Downs 

At first, it looked like the bankruptcies were on a decline. The number of filings decreased considerably in 2017 and 2018, with 25 bankruptcy filings in 2017 and 28 in 2018, Haynes and Boone reports. Then, the fourth quarter of 2018 was marked by a steep drop in oil prices — and the number of filings began to rise up again in 2019. 

The oil market gained momentum in the first quarter of 2019. But by the end of the year, everyone was speculating that the boom was already over.

The First Quarter of 2020

shale industry crowded with too much debt
The US shale industry was crowded with too much debt, too many loans, and too many companies that couldn't stay afloat.

As the New York Times wrote, Wall Street had made the oil industry's unprecedented growth possible by allowing crude oil producers to get cheap loans through junk bonds. On January 1 of 2020, Wall Street announced that oil companies (collectively owing $200 billion in debt) had four years to pay off the debt that had been accumulated through those cheap loans. As a result, new bankruptcies in the shale oil world would come. But this was just the beginning of what would be a historically volatile quarter.

The stock market began its infamous crash on February 20 after peaking the week before. 

March 6 marked the beginning of the oil price wars of 2020. Russia refused to come to an agreement with OPEC+ in their marathon nine-hour meeting. The standstill ushered in the oil price wars of 2020.

After the Dow Jones peaked in February, it went down 20 points in one day on March 11, entering into a bear market. This was the fastest 20% drop in history.

April 2020: A New Low

For the first time in history, prices dropped to a negative in one day on April 20. Suppliers were desperately trying to get rid of their extra oil before the May 1 deadline. Finding themselves with more oil than they would have been able to store, they were paying to have the oil taken off their hands. 

June 2020: A Vain Struggle to Recover

Countries began to open for business again in the late spring and early summer of 2020. Demand increased. Somewhat. By the end of June 2020, prices achieved a rebound and reached the $40/bbl range, according to Haynes and Boone. The company noted, however, that the improved range is still not high enough for many companies that are heavily in debt to be in the clear.

OPEC+ put forth efforts to pull in production to control supply and demand. Also, US producers shut down some production and delayed drilling. The month ended on a grim note as shale gas drilling pioneer Chesapeake Energy filed for bankruptcy on June 28. 

In short, a month where businesses reopened ended with a new surge of confirmed COVID-19 cases. Haynes and Boone said that any substantial, sustained growth in the market would be unlikely.

July and August 2020: Expectations for the Future

Bankruptcies Increase

In the second quarter of 2020, 18 producers filed for bankruptcy. Only five producers had filed in the first quarter. Companies like Haynes and Boone predict that this will grow. Many more US producers of shale oil will continue to file bankruptcy to seek protection from creditors. This trend is likely even if we see oil prices recover over the next few months. 

More Bankruptcy Statistics

Haynes and Boone's Oil reports show that for five years through June 30, 2020, a total of 231 producers have filed for bankruptcy. The bankruptcies involved over $152 billion in aggregate debt. This included $29 billion alone in the second quarter of 2020. 

Bloomberg's data shows that June 2020 tied as the busiest month for recorded oil and gas bankruptcies. It reached seven in total. 

What Drove the US Shale Industry Boom and Where the Industry Is Headed

Looking back, it's clear that two factors drive the US shale boom. First, oil prices that soared on an average of above $90 a barrel between 2011 and 2014 made shale oil production profitable. Second, low interest rates allowed banks and other investors to give loans to the shale oil companies. The amount of loaned money totaled almost $250 billion in 2014, wrote the Balance. These two factors allowed exploration and production to take off until the industry's debts caught up with it.

So, where does that leave the industry now? The world is still struggling with the COVID-19 pandemic, even as schools are opening for the fall. Drilling activity in the US continues to drop off. As of August 7, 2020, Baker Hughes released its weekly North American rig count. It reported that the number of active oil rigs fell by four

Only time will tell, but again, it's not over. Haynes and Boone say that only lower prices over longer periods of time will bring the shale industry back to its feet. If you think something else will resurrect the industry — or if you think it’s dead for good — let’s talk about it.

Where does this leave you as an entrepreneur and/or investor into technology that is selling into the unconventional industry? You tell me.