In an instant, 33% Oasis Petroleum's oil stocks will disappear from its books. Chesapeake Energy loses 45% of its oil reserves, which is 1,1 billion barrels. Bill Barrett will lose up to 40% of the declared reserves. And this is only the beginning of a magic disappearance. It is a re-evaluation of reserves based on the revaluation of financial assets on the basis of mandatory reporting (regulatory filling), which the company has filed with the Securities and Exchange Commission. The point is that it was easier for American companies to declare large reserves of shale oil deposits and not to proceed with their immediate development. Now, when it came to real development, the work appeared to be only on paper.
According to Bloomberg, "US companies are being forced to square their reported oil reserves with hard economic reality." After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel. The wells must be drilled within five years, after they are added to the balance sheet.
Last year, despite the start of the oil price drop, most shale miners managed to avoid reassessment of their stocks. The Securities and Exchange Commission expected profitability of the claimed reserves of various fields on the basis of average value of oil prices on the first day of every month in a calendar year. The price came to $95 a barrel at the end of 2014, even though oil was trading below $50 by the time the companies reported reserves in February and March.
Meanwhile, in the next few months billions of barrels of shale drillers’ reserves will wipe out, when the companies report 2015 figures. The situation is complicated by the fact that many companies continue to cut costs as the development of new wells is delayed. All in all, America is experiencing the cuts in drilling in the oil fields. Taking into account the oil prices this year, the SEC 2015 average, including the price on December 1, comes out to $51 a barrel.
However, we have more convincing figures nowadays: 18 oil and gas companies in the United States are in the process of filing for protection under the bankruptcy. The company's revenues declined as oil prices dropped, and declining access to credits made the situation worse. To be more specific, acquiring a loan has become much more difficult. For example, Barclays expects that the rate of bankruptcies over the next year will be doubled.
The American shale revolution will continue at the expense of the state, says Mikhail Krylov, Analytical Department Head at Golden Hills-Capital Investment Company. US authorities are well aware of the threat of the low oil prices, and by all means they will try to ensure that the country will not fall to pieces. What are they going to do? First, to negotiate with the banks. It won't take a lot of convincing. Bank of America holds 9% of retail loans in areas related to shale.
If the oil industry goes under, the assets, as if by magic, will turn into bad debts, the expert believes. The credit institutions will be flexible when refinancing shale loans. What remains is to raise the public debt ceiling in order to save the banks, if oil prices stays low. Second, the US government is on good terms with hedge funds and can prohibit them to bearish oil. One quarter will be enough to make things better. By the way, hedge funds are still forbidden to trade at prices above $100.
Indeed, shale companies are having a tough time with current oil prices, Alexander Grichenkov, MFX Broker expert analyst/ MFX Capital senior analyst agrees. Today, while the majority of slate companies profitability threshold starts at $50, the price of WTI is at $38 a barrel. Thus, the solvency of US oil and gas companies (especially in the segment of shale oil extraction) has considerably dropped, which naturally led to a wave of bankruptcies and corporate defaults.
With the current prices fixed for at least next two to three quarters, the analyst expects 50% shrink of shale producers. Due to this, the oil production in the US could drop by 1.5 million barrels per day and make slightly more than 7.5 million barrels. By comparison — the country produced nearly 11 million barrels per day at the peak of its growth, and even was a world leader in oil production for some time. At long last, the current prices can lead to the shortage of supply instead of surplus, causing the quick recovery of prices at above 60 dollars per barrel.