The corona crisis has put enormous pressure on the price of oil. Many oil companies are therefore facing major challenges, especially the US shale oil companies.
Oil is often referred to as the lubricant of the global economy. But at the moment the economy is faltering. In order to slow the spread of COVID-19 disease, public and economic life has been severely restricted internationally – with correspondingly negative effects on the demand for oil. As a result, the oil price experienced a historic slump, and in April the price of a contract that provided for physical oil delivery in May fell into negative territory for the first time since futures trading began in 1983.
US shale oil companies in crisis
As a result, the US fracturing industry in particular, thanks to which the USA has been able to more than double its production in the last ten years and become the world’s largest oil producer, is now coming under severe pressure.
It is important to note that the production costs of many American shale oil companies in particular are relatively high by international standards. This is because fracking production technology, in which chemical fluids are pressed into deep layers of rock, is very expensive. In addition, many of the so-called “frackers” are highly indebted, which makes it questionable whether they have the financial stamina to survive the current phase of low oil prices.
As the US channel “CNN” reports, citing a Deloitte study, a veritable flood of insolvencies in the industry could be imminent. At an oil price of 35 dollars per barrel – currently the price level is only slightly above that – around 30 percent of shale oil companies would actually be insolvent. Another 20 percent are financially “stressed” at an oil price of 35 dollars. Should the oil price even fall to a level of 20 dollars, half of the fracking companies would actually be insolvent.
Despite historically favourable interest rates, the shale oil companies have not managed to consistently make profits in recent years. According to the consulting firm Deloitte, they have instead burned capital to the tune of 300 billion dollars since 2010.
Even former pioneers of the industry are now threatened by bankruptcy. This year, for example, 18 oil and gas companies have already defaulted on payments, reports “CNN” with reference to S&P Global Ratings. In the entire previous year, there were only 20.
A dozen of these companies with payment difficulties come from the USA, including Whiting Petroleum or Diamond Offshore. Chesapeake Energy has also been struggling with financial problems for years and could now be in serious trouble as a result of the Corona crisis.
The future does not look bright for the fracking industry. On the one hand, it is uncertain how long it will take for the economy, and thus for oil demand, to recover from the corona shock. On the other hand, investors are increasingly paying attention to the sustainability aspect and are therefore turning increasingly to clean forms of energy.
Rescue for some shale oil companies could come in the form of a takeover by one of the big oil companies such as Chevron or ExxonMobil. But according to the Deloitte study, only 27 percent of them are “attractive” takeover targets.
“Being adventurous in the current uncertain market environment could prove fatal,” the study says.
“The key question is what you can buy, and more importantly, what you should not buy,” the consulting firm explained.
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