. Another former giant of the sector, backed by Warren Buffett, is teetering. There are predictions that US shale companies could have to slash $US300 billion off the value of their assets this year.
The collapse of Chesapeake Energy at the weekend has broader resonance. It was a founder of the industry in the US, one of the trailblazers for the fracking processes that helped make the US the world’s biggest oil producer and transformed the global energy market. Occidental was involved in an ill-timed contest with Chevron for control of Anadarko Petroleum, another shale pioneer.
Having cut its production by about 85,000 barrels a day because it is uneconomic, written down its assets by about $US12 billion over the past nine months and paid Buffett $US200 million of dividends on his preference shares in scrip rather than cash, Oxy is trying to re-finance its debt. Shale had a fast payback and the internal rates of return signalled by conventional analysis indicated producers should invest aggressively. The sector was, however, extremely capital-intensive, all-in costs were high, cash margins were thin, the assets were short-life and they generated modest value relative to the investments.
In March, yields on junk bonds were soaring as prices tanked and the market was closed to new issues as fears of a wave of defaults spiked.
Good..rotten dirty industry. Things are moving away from fossil fuels.