Led By Harold Hamm, America’s Oil Frackers Are Slashing Output

People on coronavirus lockdown don’t drive around. That’s meant a cataclysmic hit to global oil demand — down by some 30%, or about 30 million barrels per day. With storage tanks and pipeline systems filling up, the Saudis, Russians and other autocratic oil nations are weighing how best to frame the necessity of cutting output. It’s different in the U.S., where oilfields are largely privately owned assets, not subject to political dictat. “Maybe we will, maybe we won’t,” said President Trump on Monday when asked whether the United States would cut. “We’ll have to make that decision.” 

Well, the decision has already been made. Harold Hamm, the billionaire oil fracker, announced Tuesday that his Continental Resources
CLR
would reduce its output in April and May by 30% — in line with the estimated hit to global oil demand caused by coronavirus lockdowns. Hamm is also cutting his $72 million a year dividend until further notice. “People can bring rigs down very quickly, and that is what we are doing in the company,” Hamm told Argus Media in an interview. “It is going to be very abrupt, with the cutback. The part we need to worry about is having a viable industry that can get going again in the third quarter or fourth quarter of this year. That is going to be test.”

Plenty more are joining Hamm. Energy consultancy Enverus in a report today predicted that most independent oil and gas companies will reduce output 40%; they expect several months of oil prices below $15/bbl this year. “There are more petroleum liquids sloshing around in the world than there is storage to contain it. Although we can expect all tight oil operations to grind to a halt in the coming weeks, there simply is not time for the tight oil patch to go into base decline. Shut-ins are coming, and they are likely to be big.”

ExxonMobil
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this morning announced its expectation of a $600 million loss this quarter. Analysts at Cowen & Company project that Exxon will generate a cash flow deficit of $3 billion this year after paying dividends. To conserve cash Exxon is reducing capex 30% to $23 billion this year, including a halving of drilling in the Permian Basin. Other Permian drillers, including Pioneer Natural Resources
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and Parsley Energy, report that they have no choice but to shut in because their pipeline partners will run out of storage in May. 

It’s a sign of these messy times that even politicians are coming around to the realization that there are no simple solutions. “Even if we get the Russians and Saudis to stop screwing us, because of the coronavirus we’ve seen demand destruction of 25 to 30 million barrels per day,” said Senator Ted Cruz, speaking this morning on the Michael Berry radio show in Houston. Cruz described his frustration last week at meeting with Saudi diplomats, whom he implored to reduce oil production. “You’re supposed to be our damn friend and here you’re waging economic warfare against Texas companies and Texas jobs,” he said he told them. Cruz said that the Saudis had committed to Trump a combined global reduction in output of more than 10 million barrels per day, which would at least slow the filling of storage. 

Cruz said that his focus this week is on making sure oil companies don’t get discriminated against when it comes to getting federal funding and bridge loans in order “to survive the economic crisis and still be viable on the other side.” 

Unfortunately many won’t survive. According to an update from Haynes & Boone, so far in 2020 the U.S. oilpatch has seen only a handful of bankruptcies involving $7.7 billion in affected debt. The biggest has been Whiting Petroleum
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, with $5.9 billion of debt. A wave should be coming — after all, last year 40 companies with $26 billion in debt went under. On the short list is Chaparral Energy, which this week saw its borrowing base cut nearly in half — it needs to repay a portion of its revolving loan, or risk default. 

Standard & Poors has this week downgraded Continental, Apache Corp
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and Occidental Petroleum
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from investment grade credits to junk. On the cusp of downgrade are Marathon Oil
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, Devon Energy
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, Hess and Diamondback. S&P sees 40% of its oil and gas high yield coverage universe defaulting by the end of 2021. 

Ironically, there’s actually a chance that the worst time for oil companies in decades doesn’t trigger a tsunami of bankruptcy filings, says Deborah Williamson, a bankruptcy attorney at Dykema and author of “When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy.” That’s because much of the underlying assets of highly indebted companies constitutes unprofitable junk that no one wants anyway. “What’s the lender going to do? Are they going to foreclose? Some do,” if they have oilfield expertise. But most banks are not interested in or prepared to take ownership — especially, Williamson told me, because of the unknown unknowns lurking in old fields: if a company enters into the chain of title for an oilfield, “at no time ever will they be free of the attendant liabilities and environmental claims.” The liquidation trustees for a company that went under last year are still seeking buyers for thousands of operated wells. 

Shutting in wells is not as easy as turning a spigot. Some older reservoirs are sensitive, and once shut off they might clog up and never come back. Williamson was talking with one producer in the Gulf of Mexico who was no longer making enough in oil revenue to cover ongoing cash expenses. But despite losing money on every barrel he didn’t want to shut in the well because then he’d be looking at potentially a multi-million-dollar liability associated with funding a plugging and abandonment operation, where the wellbore is filled with cement. When do you bite the bullet? These are the kind of assets that lenders don’t want to take any ownership of, and may prefer to get rid of via out of court settlement rather than the bankruptcy process. “For some, bankruptcy is the not the solution.”