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The massive debt accumulated by the U.S. Shale Industry is now decimating
company profits. As company debts and interest rates rise, these shale
producers interest expense also continues to increase. Debt service is
not only cutting into company profits, but it also takes a great deal of oil
and gas production to cover this expense.
For example, 16 of the top U.S. shale energy companies racked up a
hefty $5 billion interest payment. The company with the
highest annual interest expense is Anadarko Energy at a stunning $932 million
in 2017:
Devon Energy came in a distant second at $514 million while Chesapeake
took the third spot at $425 million. The 16 shale energy companies
shown on the right-hand side of the chart are listed from highest to
lowest annual interest expense for 2017. And, it is a simple
rule-of-thumb that the higher the annual interest expense, the higher overall
debt on the company’s balance sheet.
Anadarko has such a high annual interest expense ($932 million) because it
holds over $15 billion in debt. Devon Energy had the second highest
interest expense in 2017 due to its $10+ billion in debt. However,
Devon has recently sold assets and paid down its debt and lowered its
interest expense considerably. Furthermore, Chesapeake is paying $425
million a year to service its $9+ billion in debt.
It is quite remarkable that these 16 shale energy companies forked out $5
billion to service their debt last year. The debt service is an expense
that impacts the company’s net income profits.
For example, Anadarko posted a loss of $456 million in 2017.
However, they paid $932 million in interest expense last year. If
Anadarko didn’t have an interest expense, their $456 million loss would have
been a $479 million net income profit. So, these 16 companies
lost $5 billion in potential profits because they have to service their
skyrocketing debts.
Now, if we look at how much energy that needs to be produced just to cover
these companies interest expense, it is a huge amount. Just to pay off
a $5 billion interest expense payment, these shale companies had to produce
100 million barrels of oil at $50 a barrel (approximate price these companies
received in 2017).
Let me tell you, 100 million barrels is a tremendous amount of oil.
It turns out to be roughly 20 days worth of total U.S. shale oil production
at 5 million barrels per day. Which means, these shale energy companies
had to produce nearly one month supply of total U.S. shale oil production to
cover the annual interest payment last year.
What happens when U.S. shale oil production begins to finally
decline while the interest expense rises or stays the same??? That’s
correct, these companies’ interest expense will become an
ever-increasing burden for the U.S. Shale Industry.
Watch over the next 1-2 years as U.S. shale oil production peaks and
declines. This will mark the end of the notion of U.S. Energy
Independence forever.
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