Spiralling debt could cripple US shale industry

Downward graph
Source: DollarPhotoClub

The debt used to fuel the US shale boom is now threatening to cripple the industry, with more and more of drillers’ revenue being swallowed by interest payments. More than 10 percent of revenue for 27 of 62 drillers goes towards interest payments according to the Bloomberg Intelligence North America Independent Exploration and Production Index.

According to estimates, drillers’ debt rose to $235 billion at the end of the first quarter, an approximate increase of 16% on the past year, while revenue shrank across the board. With oil prices falling 43% in the past year, many shale gas companies have been forced to shut rigs across the US.

Some analysts believe that the current situation is down to the fact that most companies spent more than they earned, even when oil prices were at $100 per barrel. The companies in the Bloomberg index spent $4.15 for every dollar earned selling oil and gas in the first quarter, almost double that of $2.25 a year earlier.

According to a May report from Standard & Poor in New York, almost half of the 105 US exploration and production companies that it rates have had their outlook lowered or credit downgraded. One-third of worldwide corporate-debt defaults this year were from oil and gas companies, with missed interest payments the leading cause.

In a report published early this month the Energy Information Administration said it expected US oil production to fall this month and continue to slide until early 2016 as shale drillers reduce spending. This decline in production could hurt revenues going forward, making matters even worse.

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