The debt that fueled the U.S. shale boom now threatens to be its undoing.
Drillers are devoting more revenue than ever to interest payments. In one example, Continental Resources Inc., the company credited with making North Dakota’s Bakken Shale one of the biggest oil-producing regions in the world, spent almost as much as Exxon Mobil Corp., a company 20 times its size.
The burden is becoming heavier after oil prices fell 43 percent in the past year. Interest payments are eating up more than 10 percent of revenue for 27 of the 62 drillers in the Bloomberg Intelligence North America Independent Exploration and Production Index, up from a dozen a year ago. Drillers’ debt ballooned to $235 billion at the end of the first quarter, a 16 percent increase in the past year, even as revenue shrank.
“The question is, how long do they have that they can get away with this,” said Thomas Watters, an oil and gas credit analyst at Standard & Poor’s in New York. The companies with the lowest credit ratings “are in survival mode,” he said.
The problem for shale drillers is that they’ve consistently spent money faster than they’ve made it, even when oil was $100 a barrel. The companies in the Bloomberg index spent $4.15 for every dollar earned selling oil and gas in the first quarter, up from $2.25 a year earlier, while pushing U.S. oil production to the highest in more than 30 years.
“There’s a liquidity issue, and you start looking at the cash burn,” Watters said.
Distressed Debt
Continental borrows at cheaper rates than many of its smaller peers because its debt is investment grade. S&P assigns speculative, or junk, ratings to 45 out of the 62 companies in the Bloomberg index.
“Our cash flow easily covers interest costs, and we expect to continue maintaining our investment-grade credit rating as commodity prices recover,” said Warren Henry, a spokesman for Oklahoma City-based Continental.
Almost $20 billion in bonds issued by the 62 companies are trading at distressed levels, with yields more than 10 percentage points above U.S. Treasuries, as investors demand much higher rates to compensate for the risk that obligations won’t be repaid, data compiled by Bloomberg show.
“Credit markets have played a big role in keeping the entire sector alive,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd., a consulting firm in London.
So far this year, S&P lowered the outlook or downgraded the credit of almost half of the 105 U.S. exploration and production companies that it rates, according to a May report.
