The Tulsa Riot: Hoisted from the Archives

Are fracking firms little more than a bubble? I cannot tell whether the Economist is on to something here or not: Schumpeter: America’s Shale Firms Don’t Give a Frack About Financial Returns: "Shale fracking... is booming once again... But... the business has burned up cash for 34 of the last 40 quarters.... With the exception of airlines, Chinese state enterprises and Silicon Valley unicorns—private firms valued at more than $1bn—shale firms are on an unparalleled money-losing streak. About $11bn was torched in the latest quarter...

...as capital expenditures exceeded cashflows.... The industry makes huge accounting losses.... The biggest 60 firms in aggregate have used up $9bn per quarter on average for the past five years. As a result the industry has barely improved its finances despite raising $70bn of equity since 2014. Much of the new money got swallowed up by losses, so total debt remains high, at just over $200bn.... There are two theories for why this is happening. One is that the way in which executives are paid, together with lenders’ incentives, means that Houston is always vulnerable to investment mania.... The only way that the mania will end well is if oil prices rise sharply, bailing out the industry, or if E&P firms are bought by bigger energy firms.... The second explanation is oil executives’ belief in increased output from the Permian, and higher productivity. Most E&P firms reckon they can expand production at an annual rate of 10-20% over the next few years....

There is something heroic—and baffling—about America’s shale firms. They are the marginal producer in a cyclical industry, and that is usually an unpleasant place to be. The oil bulls of Houston have yet to prove that they can pump oil and create value at the same time....


#shouldread

Comments