The money pipeline is running dry for large portions of the US shale oil sector, tipping drillers into bankruptcy and threatening the industry’s breathtaking growth in oil production.
Spooked by lower oil prices, equity and bond investors are now shunning the smaller, independent shale explorers that lifted the US to the top rank of global oil producers. Meanwhile, say analysts, banks have pulled in their horns, and are likely to further restrict companies’ capacity to borrow when they begin their twice-annual reviews of loans secured by oil and gas reserves. Market-watchers expect this financing squeeze to trigger a wave of mergers among smaller companies in the Permian Basin and other shale-oil regions.
Public investors believe the sector has “five to 10 too many” companies and want to see a consolidated industry with greater scale, less debt and better control of capital spending, said Matt Portillo, managing director for upstream research at investment bank Tudor, Pickering, Holt & Co.
The financial reckoning has been a long time coming. In the aftermath of the 2014-15 oil price crash, US oil and gas producers managed to raise $56.6bn from equity and debt capital markets in 2016, according to Dealogic. This year they have raised just $19.4bn, even though US oil production has grown by more than a third in the past three years.