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The once powerful partnership between fracking companies and Wall Street is collapsing as the industry strives to attract investors after nearly a decade of financial losses.
Frequent capital injections on Wall Street fueled the shale boom in the United States. But these largesse are exhausting. New bond and equity deals reached their lowest level since 2007. Corporations raised approximately $ 22 billion of equity and debt financings in 2018, less than half of the total in 2016 and almost one-third of the total. what they reported in 2012, according to Dealogic.
The loss of this lifeline is forcing oil shale companies – which have helped turn the United States into an energy superpower – to cut spending and face the prospect of slowing growth. More than a dozen companies have announced cuts in their spending so far this year, even as crude oil prices have risen more than 20% from the December lows. Others are expected to tighten their budgets as the results come out in the coming weeks.
The decline in financial support is particularly felt by smaller and more indebted drillers. But even larger and better capitalized frackers are facing renewed investor skepticism about whether they can control their spending while meeting growth and cash goals.
Actions of
Continental resources
Inc.
fell 5.4% on Tuesday, after the shale company, founded by billionaire Harold Hamm, revealed that fourth-quarter spending was 10% higher than analysts' forecasts.
Wall Street support has allowed shale companies to persevere thanks to a drop in oil prices that began in 2014, helping the United States to overtake Saudi Arabia and Russia as the world's largest oil producer , with 11.9 million barrels a day in November, according to the US Energy Administration Information.
Banks provide financing when producers spend more money than they receive from their activities, which has been happening every year since 2010. They also help companies cover their future oil production to set prices and prices. avoid volatility in markets, and provide them with revolving loans. future prospects for oil and natural gas.
But in 2016, federal regulators worried about banks' exposure to shale drillers tightened lending standards to oil and gas companies after dozens of them went bankrupt as a result of falling commodity prices. based. According to US Treasury Department guidelines, lenders should consider loans as a problem if the total debt of the company exceeds 3.5 times the producer's income, excluding interest, taxes and other accounting items. .
Many banks now prefer to keep operators below 2.5 times their profits, bankers and lawyers said. Nevertheless, 20 companies were posting 2.5 times or more in the third quarter, and the sector remained more indebted at that time than in the same period three years ago, according to S & P Global Market Intelligence.
"There was a frenzy at the time to fund the next promising story," said Scott Roberts, head of high yield investments at
Invesco
Ltd.
, which manages over $ 800 billion in assets. "Too many people have been burned, so the appetite for that is not there today."
With US oil prices hovering around $ 57 per barrel, even a modest increase in the cost of borrowing is enough to eliminate any potential profits this year for some companies. Many companies do not have much room for maneuver if they want to meet the demands of investors for better profitability. And unlike a few years ago, shareholders have no interest in paying for unprofitable shale drilling.
Many shareholders have urged shale leaders to live within their means, spending only the revenues generated by their activities, but they have not welcomed announcements of declining production, cash flow or growth.
Actions in
CNX resources
Corp.
, a small company that is drilling in Pennsylvania, is down more than 20% in the last three weeks after announcing spending cuts that some analysts believe will lead to a decline in production by the end of the year. year. A spokesman for CNX said the company expects a production increase of up to 6% from the fourth quarter of 2018 and the same period this year, as well as every year compared to 2018, even as she reduces her expenses.
Concho Resources
Inc.
one of the largest operators in the burgeoning region of West Texas, lost more than 13% in the two days since the publication of results that did not meet the expectations of analysts in cash flow. Concho also announced its intention to reduce expenses by 17% compared to previous forecasts, a reduction that would result in an increase in oil production of 15% in the fourth quarter of 2018 at the same time this year, instead of 25%. %.
The link between US producers and financiers does not seem completely broken, and the largest shale companies continue to attract Wall Street lenders. Industry ringtones such as
EOG Resources
Inc.
have started to generate free cash flow and do not need external funds. They also locked land for future drilling sites and have less need to spend billions on new stocks, a major source of capital requirements in previous years.
"At the end of last year, the investment community had a more bearish outlook, even with a significant improvement in operational efficiency," said Tim Perry, co-head of the global oil and gas industry. 'industry.
Swiss credit
AG
. "Yet, recently, the sector has performed well relative to other sectors, so the start of a recovery may be occurring now."
Nevertheless, over the last six months, many companies have been sanctioned after using capital markets to finance acquisitions or other strategic priorities. In 2016, these initiatives were well received by investors who supported the expansion.
"We are finding that funding sources are drying up as cash is more difficult to find, especially debt," said the Mayor of Regina, who is responsible for energy activities at KPMG. "I do not think they have this kind of card without a prison release as they had it last time."
Write to Bradley Olson to [email protected] and Rebecca Elliott to [email protected]
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