The Phaserl


THE GREAT U.S. ENERGY DEBT WALL: It’s Going To Get Very Ugly….

by Steve St. Angelo, SRSRocco Report:

While the U.S. oil and gas industry struggles to stay alive as it produces energy at low prices, there’s another huge problem just waiting around the corner. Yes, it’s true… the worst is yet to come for an industry that was supposed to make the United States, energy independent. So, grab your popcorn and watch as the U.S. oil and gas industry gets ready to hit the GREAT ENERGY DEBT WALL.

So, what is this “Debt Wall?” It’s the ever-increasing amount of debt that the U.S. oil and gas industry will need to pay each year. Unfortunately, many misguided Americans thought these energy companies were making money hand over fist when the price of oil was above $100 from 2011 to the middle of 2014. They weren’t. Instead, they racked up a great deal of debt as they spent more money drilling for oil than the cash they received from operations.

As they continued to borrow more money than they made, the oil and gas companies pushed back the day of reckoning as far as they could. However, that day is approaching… and fast.

According to the data by Bloomberg, the amount of bonds below investment grade the U.S. energy companies need to pay back each year will surge to approximately $70 billion in 2017, up from $30 billion in 2016. However, it gets even worse each passing year:

As we can see, the outstanding debt (in bonds) will jump to $110 billion in 2018, $155 billion in 2019, and then skyrocket to $230 billion in 2020. This is extremely bad news because it takes oil profits to pay back debt. Right now, very few oil and gas companies are making decent profits or free cash flow. Those that are, have been cutting their capital expenditures substantially in order to turn negative free cash flow into positive.

However, it won’t be enough… not by a long-shot. If we use some simple math, we can plainly see the U.S. oil industry will never be able to pay back the majority of its debt:

Shale Oil Production, Cost & Profit Estimates For 2018

REVENUE = 5 million barrels per day shale oil production x 365 days x $50 a barrel = $91 billion.

EST. PROFIT = 5 million barrels per day shale oil production x 365 days x $10 a barrel = $18 billion.

If these shale oil companies did actually produce 5 million barrels of oil per day in 2018, and were able to make a $10 profit (not likely), that would net them $18 billion. However, according to the Bloomberg data, these companies would need to pay back $110 billion in debt (bonds) in 2018. If they would use all their free cash flow profits to pay back this debt, they would still owe $92 billion.

Yes, it is true, I am not including all U.S. oil and gas production, but I am just trying to make a point here. We must remember, this debt is below investment grade and is likely more of the shale oil and gas producers. Furthermore, these shale oil and gas producers are using most of their free cash flow to drill more wells to produce more oil. So, in all reality, they would not take most all of their profits or free cash flow to pay down debt. They just wouldn’t have the funds to continue drilling.

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