The Shale Reckoning Comes to Oklahoma

Business News/Analysis, Funding/Financing/Investing, Oklahoma, Opinions

March 11, 2016

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by Asjylyn Loder (Bloomberg BusinessWeek) … The excitement made it easy to ignore one big problem: It was one of the most expensive booms in history. Devon, Chesapeake, SandRidge Energy, and Continental Resources were spending almost $2 drilling for every $1 they earned selling oil and gas. Moreover, the output from shale wells fell far faster than that of traditional wells, as much as 60 percent to 70 percent in the first year alone. To sustain the growth investors demanded, companies had to drill fast enough to offset those declines. That phenomenon is called the Red Queen, after the character in Through the Looking-Glasswho tells Alice, “It takes all the running you can do, to keep in the same place.”

From 2011 to 2014, those four companies outspent cash flow by a combined $36.8 billion. This wasn’t a problem as long as high oil prices made refinancing easy. Years of near-zero interest rates had sent investors hunting for returns in riskier corners of the market. Of the 97 exploration and production companies evaluated by Standard & Poor’s in April 2014, 75 had ratings below investment grade. That didn’t scare investors. From 2004 to 2014, the high-yield bond market doubled while the amount issued by junk-rated companies in the industry grew 11-fold to $112.5 billion, according to Barclays. As Stanley Druckenmiller, an investor with one of the best long-term records in money management, said of Texans in January 2015: “Those guys know how to gamble, and if you let them stick a hole in the ground with your money, they’re going to do it.” Shale wasn’t sustaining the frenzy; cheap debt was.

Such was the belief in the staying power of high oil prices that in October 2014, when crude dipped to $85 a barrel, Continental liquidated its insurance protecting the company from a crash.

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Politicians said they’d diversify the economy. But the present just echoes the past. In 1982 the oil industry paid 13 percent of worker earnings in Oklahoma, according to Wilkerson of the Kansas City Fed. At the end of 2014, it was 14 percent.

If the 1980s are an indication, it could take years for Oklahoma to recover—even if prices rise. The state faces a $1.3 billion budget shortfall. And there’s a backlash against the industry because of recent earthquakes blamed on fracking. READ MORE and MORE (Advanced Biofuels USA)

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