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Second U.S. Shale Booms Legacy

Oil and gas companies plunged over $156 billion into corporate takeovers and land deals during the second U.S. shale boom, in a massive bet that good times would continue and crude prices would rise. Many of those deals have become financial albatrosses.

he prospect for relief is limited: the industry is still working through the shock of a historic collapse in fuel demand in such a short period of time, prompted by the sudden impact of the coronavirus on global mobility. Oil companies are cutting their budgets to preserve cash and survive – not to spend it on buying more companies.

That leaves few companies with the money or the appetite to buy distressed assets. Another 150 North American oil and gas producers could face bankruptcy by the end of 2022, according to Rystad Energy, if crude prices remain near current levels.

The shale revolution turned the United States into the world’s largest crude producer, pumping out more than 12 million barrels per day (bpd) at its peak. The industry beat forecasts again and again for production growth, but rarely for financial returns.

Still, the promise of future returns lured investors, including a wave of acquisitions that happened after the first boom when prices pulled back sharply from 2014 to 2016.

Now, many of the 2016 to 2019 shale deals are financially unworkable due to low oil prices, according to six people familiar with the transactions.

Production has fallen by more than 1 million bpd, and there is little to encourage a sustained rise in prices. Fuel storage is brimming worldwide, and fuel demand has been slow to recover even as global lockdowns ease.

Investors are wary of energy shares, as the S&P 500 Energy sector is down 40% this year even as the U.S. stock market touched new highs this month.

Oil companies such as BP Plc, Occidental Petroleum Corp and Exxon Mobil Corp made highly publicized purchases that have lost substantial value. BP, Royal Dutch Shell and others have cut the assumed value of those assets, conceding big wagers on shale will not pay off.

Source: FXPro