Awareness is gradually seeping into the financial press that the Great American Oil Revolution has been over for months — witness the current Fortune headline, “Frackers Could Soon Face Mass Extinction.” If the general media had any grasp of what was happening in America, or what it meant, CNN would be doing wall-to-wall coverage of the deserted man-camps in North Dakota, the unemployment lines in Texas, the equipment yards stacked with idle derricks, the spreading panic in the junk-bond, bond and stock markets. Instead we get Donald’s beautiful tax plan, Hillary’s elusive emails and Carly’s mythical video tapes.
Today is the last day of the rest of the frackers’ lives. That’s because it is the last day of the third quarter of the year, the day after which banks audit their loans, assessing anew the value of the assets held as collateral.
Frackers pledge their oil reserves, and those reserves are worth today about half of what they were worth a year ago. A year ago, they borrowed everything they could. In about two weeks when the audits are done they’re going to have to give half of it back. Many of the companies don’t have it.
Analysts quoted by Fortune expect a third of the fracking companies to go under.
I expected this to happen at the end of the first quarter, when the banks did the first of their two annual reassessments. But I forgot the old rule of thumb: borrow ten thousand dollars, and the bank owns you, borrow ten million and you own the bank. Back in April, lenders bent over backwards to avoid reclassifying loans, and predatory investors poured money into junk-bond rollovers of expiring junk bonds, because they simply could not believe that the ride was over. Prices would go back up, was the mantra they chanted, and all would be well again.
As I’ve reported here over and over, this disaster would have overtaken the fracking patch even if oil prices had not tanked, because its root problem was the hideous decline rate of fracking wells, most of which are exhausted within four years.
Imagine if they built houses of water-soluble materials. You buy a house for $200,000 or so, and at the end of four years it’s uninhabitable and worthless, and you have to buy another one. You might have been making good money those four years, but enough to set aside $50,000 a year? That’s been the fracking problem from the beginning, and virtually every company in the business has had to borrow heavily – actually, recklessly — to stay in the game.
Which is over. For most. There will always be some operators diligently wringing out the last few drops of combustibles, but the Brave New World of American oil supremacy in a cowed world, the age of American energy security, the renewed American oil economy — all creations of marketing departments in search of the proverbial greater-fool investors and lenders — are toast.
Still can’t believe it? Check out David Stockman, “Going Broke in the Shale Patch;” Oil Price.com, “Is This the End of the Shale Gas Revolution?;” CNBC, “US Drillers About to Start Hemorrhaging;” Bloomberg, “Wall Street Lenders Growing Impatient with U.S. Shale Revolution” and “Junk-Debt Investors Fight for Scraps as U.S. Shale Rout Deepens;” and even the Wall Street Journal, “Fracking Firms that Drove Oil Boom Struggle to Survive.”
Yes, it’s morning in the American fracking patch, but instead of Ronald Reagan’s rhapsodic dawn it’s more like something out of Revelations. Even the staid Fortune Magazine says, “Doomsday may finally be coming to the fracking industry.”