Scary cash flows from tight oil and gas fraccers

StockAnalysis' Peter Strachan.

StockAnalysis' Peter Strachan.

Analysis of the USA’s active light tight oil (LTO) producers produces a clear verdict. As a group, the LTO operators are all severely cash flow negative and their business model is not financially sustainable, even at much higher oil and gas prices.

A recent tally showing free cash flow generation alongside capital spending by seven of the USA’s most active LTO producers during financial year 2015 reveals that even after generating $US22.8 billion of discretionary cash flow from operations, a net negative cash flow of over $US6.7 billion was achieved during FY2015.

Even after reducing capex budgets for FY 2015, these seven large players alone poured nearly US$30 billion of capital into their projects, which required debt or equity support to sustain ongoing development.

The numbers are also in for BHP Billiton’s full year. Its onshore US petroleum (LTO) business boosted output from 296,300 barrels of oil equivalent per day (boe/d) in FY2014 to 344,300 boe/d in FY2015. This is not a small business!

For scale, it spits out more oil equivalent per day than Australia’s total oil output, yet it is massively cash flow negative. After capital spending, but before notional cost to service debt or any sort of return to shareholders, the business consumed a net amount of $US1.96 billion in 2014 and $US1.65 billion last year.

While cash operating costs come in at $US17/boe, the price it received for a mix of oil, natural gas liquids and gas averaged just $US33.20/boe. Natural gas trades below $US17/boe in the USA and gas liquids suffer a massive discount because of an artificial oversupply. BHP’s total costs after depreciation, including capital spending, but not notional interest or corporate overheads, amount to ~$US73.60/boe!

BHP Billiton estimates that its US onshore LTO operations could be cash flow neutral this year with oil an oil price of $US60/bbl and gas at $US3.50/mmBTU, so with WTI crude trading at around $US45/bbl and gas at around $US2.72/mmBtu, BHP’s shareholders are still pouring funds into this costly enterprise.

Even if BHP’s estimate for financial breakeven is correct, StockAnalysis doubts that BHP’s onshore LTO business could be truly profitable with an oil price below $US100/bbl while gas was below $US4/mmBTU.

BHP’s onshore oil business is not a business at all – it’s a charity.

Quiet analysis of the USA’s LTO and gas production shows that the whole business model can only be financially sustainable so long as the companies can borrow cheaply to fund operations.

US oil production has fallen about 400,000 boe/d since a peak in April 2015. Active drilling rig numbers resumed a downward trend in September and look like falling below 600 rigs, down from 1,600 oil directed rigs at the mid-2014 peak.

Ultimately, despite drill rig efficiencies and operating cost reductions, reducing development effort will result in falling output of oil and gas in the USA. StockAnalysis estimates that US oil production will continue to decline by between 90-140 KBOPD per month through into mid 2016 and possibly beyond.

Meanwhile, petroleum consumption in the US has jumped by about 1.2 MMboe/d over the last couple of months and is now approaching pre-GFC highs. Demand is clearly responding to lower prices in the USA, a trend that will be replicated globally when trustworthy numbers are tallied.

Peter Strachan is the author of StockAnalysis, a leading-edge, independent news source focused on stock market news, analysis and recommendations.

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