Never before has drilling for oil plunged this far this fast.
The word “boom” can never be thought of as a stand-alone concept that
everyone loves, particularly governments because they get to rake in the big
bucks. It’s always attached to its miserable twin that no one wants to see,
the “bust.” They come invariably in cycles, one after the other. You
can’t have one without the other. It’s just a question of time. And in the
world of fracking, it’s no different.
The fracking-for-oil boom started in 2005, collapsed by 60% during the
Financial Crisis when money ran out, but got going in earnest after the Fed
had begun spreading its newly created money around the land. From the trough
in May 2009 to its peak in October 2014, rigs drilling for oil soared from
180 to 1,609: multiplied by a factor of 9 in five years! And oil production
soared, to reach 9.2 million barrels a day in January.
That’s what real booms look like. They’re fed by limitless low-cost money
– exuberant investors that buy the riskiest IPOs, junk bonds, leveraged
loans, and CLOs usually indirectly without knowing it via their bond funds,
stock funds, leveraged-loan funds, by being part of a public pension system
that invests in private equity firms that invest in the boom…. You get the
idea.
That’s how much of the American shale-oil revolution was funded.
Production soared for five years and eventually outpaced sluggish demand.
Crap happened on the world scene, and suddenly the fracking boom, the biggest
no-brainer in the history of mankind, turned into a terrible bust.
On the drilling side, the bust began in mid-October last year, after the
price had been plunging for over three months. At that time, 1,609 rigs were
actively drilling for oil, according to Baker Hughes. Since then, week after
week, drillers were idling rigs as fast as they could.
In the latest reporting week, drillers idled another 84 rigs, the second
biggest weekly cut ever, after idling 94 rigs two weeks earlier. Only 1056
rigs are still drilling for oil, down 443 for the seven reporting weeks so
far this year and down 553 – or 34%! – from the peak in October.
Never before has the rig count plunged this fast this far:
What if the fracking bust, on a percentage basis, does what it did during
the Financial Crisis when the oil rig count collapsed by 60% from peak to
trough? It would take the rig count down to 642!
During the financial crisis, it was a very brief but violent dip with an
instant V-shaped recovery. But regular oil busts in the past have taken years
to work through their problems. And rather plunging production, we’re still
seeing record-breaking production.
When will production level off?
The natural gas fiasco has shown that a price that falls below the cost of
production is no incentive to cut production for the industry as a whole, as
long as it gets new money to drill into the ground. The Fed’s boundless
liquidity and its interest-rate repression have seen to it. But the
emphasis is on producing more with less – and paper over the losses.
The number of rigs drilling for natural gas in the last reporting week
fell by 14 to 300, the lowest since May 1993, having collapsed by 81%
since 2008:
But natural gas production is still soaring from record to
record. And the price destruction continues to this day.
Companies like Samson Resources that have focused on dry-gas production
are now barely hanging on. Samson has lost over $3 billion since it was
acquired in 2011 by a group of private-equity firms led by KKR,
which has now written down its investment to 5 cents on the dollar. But
Samson is still drilling for gas! [read… Money
Dries Up for Oil & Gas, Layoffs Spread, Write-Offs Start].
So if natural gas is the model, the production of oil isn’t going to slow
down anytime soon. But if there is no V-shaped recovery of the price of oil,
the exploration-and-production sector and its suppliers will be in a world of
hurt, possibly for years.
The pain is already hitting Houston, the corporate epicenter of the
American oil boom. Projects are being put on hold, “and everyone is waiting
for the other shoe to drop,” an engineer in the energy sector said. “Not
pushing the panic button by any means” is how the Texas banking regulator
phrased it. But it’s looming in front of everyone. Read… Oil
Bust Hits Office Construction Boom, Banks, Suppliers – But Hey, “So Far” No
Apocalypse
