The U.S. Shale Oil Industry is in serious trouble as its debt spirals higher due to its massive production decline rates. While the mainstream media continues to put out hype that the shale oil industry can produce oil at $30 or $40 a barrel, the reality shows that it’s becoming difficult just to finance its debt.
Yes, it’s true. Many of the shale oil companies are bringing on new wells just to pay the interest on their debt. Now, this wasn’t the case back in 2008 when the U.S. Shale Oil Industry first took off as most of the shale energy companies held very little debt and paid a tiny percentage of their operating income to finance its debt.
For example, Continental Resources (CLR) who labels itself as “America’s Oil Champion” is one of the larger shale oil producers in the Bakken Shale Oil Field in North Dakota. Before Continental Resources started to pour money into the Bakken, its total debt was $165 million, and its annual interest expense was a paltry $13 million in 2007:.
However, if we scan across the table above, we can see that Continental Resources paid $321 million in 2016 just to service its debt that has now ballooned to $6.5 billion. If we divide the $321 million interest expense by its $6.5 billion in debt, it turns out to be about an average 5% interest charges. Can you imagine paying nearly one-third of a billion dollars in an interest payment?
To get a better idea how bad the financial situation is at Continental Resources, let’s look at their Q2 2017 report:
You will notice that Continental Resources recorded a $29 million operating income loss in the second quarter. Unfortunately, they did not have the funds to pay their $72.7 interest expense that quarter. We can also see in the first half of 2017, Continental Resources made an operating income profit of $48.1 million, but their interest expense was $144 million.
So…. what we have here is one of the larger shale oil producers in the Bakken that didn’t make enough operating income just to cover its interest expense. If the oil price does not rise to $70-$80, these shale oil producers are going to have difficulty paying their interest expense.
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