US shale bankruptcies accelerate despite pandemic protection
The US oil industry has had a particularly tough time coping with the Covid-19 pandemic despite numerous federal relief measures to help ease the pain.
The US oil industry is trying to recover from the worst demand shock in the history of oil markets. Some companies launched the long-awaited consolidation in the sector, while many others filed for bankruptcy as unsustainably low oil prices this year weighed on already weakened balance sheets. The US shale patch had access to some form of government relief during the pandemic, like all businesses in the United States. The oil and gas industry received tax breaks, royalty relief, and forgivable loans under the Paycheck Protection Program to keep employees during the pandemic.
Yet, bankruptcies in the shale patch started to accelerate in the second quarter after oil prices crashed in early March because of the demand collapse and the Saudi-Russian price war. US drillers immediately scaled back capital spending and curtailed more than 2 million barrels per day (bpd) of oil production between April and June in response to the crash in prices.
Thousands of jobs in the industry have been lost over the past six months, and a good portion of those jobs lost may never return.
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The US shale patch has been struggling this year and is bracing for more hardship with the incoming Administration of Joe Biden, who has vowed to ban new oil and gas drilling on federal lands and waters.
The federal relief during the pandemic, especially royalty rate reductions on federal land and offshore, has not been very effective because of a lack of uniform decision-making, the nonpartisan Government Accountability Office (GAO) said last month.
Environmental advocates, of course, point the finger at the mere fact that the federal government dared provide relief for the fossil fuel industry.
According to a new analysis by BailoutWatch, Public Citizen, and Friends of the Earth, the fossil fuel industry received between US$10.4 billion and US$15.2 billion in direct economic relief, with more than 26,000 coal, oil, and gas companies benefiting directly. In addition, indirect benefits in the form of bond funds bought by the Fed and billions of newly issued company bonds “pushed government aid to the industry past US$110 billion,” say the activists in their report Bailed Out & Propped Up, which slams government support to the “money-losing dirty energy companies” and shames the firms that made use of federal government programs. The report goes on to recommend that “Congress must explicitly exclude further aid to the fossil fuel industry from any future coronavirus relief packages.”
The Fed wasn’t spared in the report either: “By insisting fossil fuel companies deserve protection and support, the Fed has exacerbated the already dire threat of climate change, prolonging oil and gas companies’ ability to borrow money at lower rates than investors were willing to offer before the pandemic,” the authors say.
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Some other analyses have shown that “the dirty energy companies” did not just tap into government money to boost top executive pays and keep dividends to shareholders.
According to a Houston Chronicle analysis from July, the Paycheck Protection Program, with more than US$1 billion in forgivable loans to companies, helped to save more than half of oilfield jobs in Texas. According to the analysis of figures from the Small Business Administration, companies in Texas were able to keep 93,117 jobs or more than half of the 182,500 people employed in the sector in Texas.
Thousands of jobs have been lost since March in the US upstream and oilfield services sectors as the oil industry is becoming leaner in the aftermath of the pandemic.
After a wave of bankruptcies in the third quarter, North American oil producers and oilfield services companies continued to file for protection from creditors at the start of the fourth quarter, law firm Haynes and Boone said in its latest tally to October 31 last week.
Among healthier companies with quality assets, consolidation has been the hottest thing in recent weeks.
There is new-found enthusiasm for M&A deals in the US shale patch, data and analytics company GlobalData said in a new report on Tuesday.
“In all of the recent deals and likely in future mergers, there is a significant acreage in unconventional areas involved, especially in Permian Basin,” said Andrew Folse, Oil and Gas Analyst at GlobalData.
“This basin remains the most attractive acreage in the US Lower 48 and provides very competitive payback periods, measured in months, unlike offshore projects where the payback periods are usually measured in years.”