THE BIG OIL BUST

As the Trends Journal has been reporting, U.S. oil companies – especially those heavily invested in fracked wells – are facing three threats to their existence: oil prices lower than they’ve been for years and, for many companies, lower than the cost of pulling oil out of the ground; the global economic shutdown; and $86 billion in bonded debt coming due between now and 2024.
In 2019, 42 U.S. producers with a collective $26 billion in debt filed bankruptcy. At the time, WTI oil prices were still above $50.
In recent days, prices have fallen into mid-$20 a barrel range.
Chesapeake Energy, a leader in the fracking frenzy less than a decade ago, has hired law firm Kirkland and Ellis and financial firm Rothschild & Co. to help it manage its $2 billion in debt.
The company’s troubles are so deep that a bond maturing in 2025 that was worth 80 cents on the dollar on 20 February cratered to 18 cents last Friday.
Whiting Petroleum, a major player in the North Dakota oilfields that were a focus for fracking, is struggling under $2.9 billion in debt. Its $770-million bond maturing next year has fallen in value from almost 100 cents on the dollar two months ago to 24 cents now.
California Resources, the largest producer in its namesake state, was renegotiating $895 million in debt with note holders but talks ended recently. A company bond maturing in 2022 recently was trading at four cents on the dollar.
TREND FORECAST: We forecast that as many as half of U.S. small and medium-size oil and gas producers will disappear as a result of the current crisis.
This rate of failure is not only possible but growing more likely by the day.
With the “Greatest Depression” having now begun, the world’s economy will take years to fully recover from the double blows of the government coronavirus panic actions that closed down entire economies and the global slowdown that was underway before the virus arrived.
TREND FORECAST: From Saudi Arabia to Iran, from Venezuela to Nigeria, as oil prices continue to sink and the “Greatest Depression” worsens, oil-rich nations rich and poor will be battered by social unrest and government coups.
It should be noted that although the equity markets around the world spiked on news of a U.S. government bailout, and the Dow was up 11 percent on the day, oil prices closed up just 1 percent despite energy stocks sharply rising.
This indicates low expectations for strong economic growth. Thus, there will continue to be much more supply than demand.
Houston Real Estate Signals Cheap Oil
With an unusually high number of petroleum industry companies in its buildings, Houston’s commercial real estate sector is expected to be hit especially hard by three blows: oil prices at lows unseen in years, the virus pandemic, and the global economic slowdown that began months before the virus arrived.
With oil prices dropping into the $20s and not enough demand returning any time soon to sop up the global oversupply, Houston’s petroleum industry could lose as many as 12,000 jobs, analysts say.
Low prices and looming loan repayment due dates that small producers are facing are likely to bankrupt hundreds of companies, leaving their offices empty.
Oilfield service companies – geologists, chemical and pipe suppliers, drill rig owners, and others – are closing down as quickly as producers are.
Invesco, MetLife, Nuveen Real Estate, and others among the continent’s largest commercial real estate companies have holdings in Houston’s 213 million square feet of office space, where loan defaults already are on the rise.
This month, a $67.9-million loan secured by the 471,000-square foot Pinnacle Westchase office campus in Houston was transferred to a special handler because the loan was reclassified as facing “imminent default.”
Vacancy rates in Houston’s office blocks had risen to 23 percent in 2018 after an oil glut and resulting price trough put many companies out of business. The rate was still at 22.4 percent in December.
Houston’s economy has diversified in recent years, expanding from oil and gas into health care and international trade. The diversity can help soften the blow dealt to commercial real estate.
Commercial real estate investments in cities that have failed to diversify will fare worse. Calgary, Canada’s “oil city,” entered the virus panic with 11.5 million square feet of office space empty. Odessa, Texas, and Lafayette, Louisiana, among others, also are heavily oil-dependent.
Oil Storage Space Running Out
Hoping to make all they can and knowing how costly it is to cut production and then restart it, even though oil prices have plunged below $30 and global demand is crashing, the global oil industry is still pumping crude.
As a result, there’s now no place to put it.
Owners of “tank farms,” the arrays of cylindrical steel tanks where crude is stored, are besieged by calls from oil producers, as well as those who grabbed stockpiles of oil as prices crashed, looking for a place to put their stock.
As tank farms fill up, oil is being stored at sea aboard tankers.
The price of leasing a tanker for six months has skyrocketed to $85,000 a day. Three-month charters run as high as $150,000 a day and spot-market charters are going for as much as $300,000 a day, Robert Matthews of Gibson Shipbrokers reports.
“We’re not going to have any space onshore and it will be hard to find any storage on water,” said analyst Giovanni Serio at Vitol, the world’s largest oil trading firm. “Therefore, the price will have to fall to motivate someone to cut production.”
This spring, world oil use could drop from an average of about 100 million barrels a day to 75 million, according to The Eurasia Group, an analytics firm.