Can the ASX's American frackers survive sub-$US20 oil?

On Monday night the US oil price dropped into negative territory to -$US37.63 a barrel, after falling to its lowest point in 21 years during the day in Asian trade.

The causes were technical and oil scheduled to be delivered in June, a more realistic figure for how the market feels about US crude, slid 16 percent to $21 a barrel.

Yet in a market where no one wants to be holding crude as the main US storage hub Cushing will be at capacity in weeks, some ASX-listed companies are shutting their American oil fields.

Eon NRG (ASX:E2E) chief financial officer Simon Adams says a high break price and rapidly rising refinery costs means the company will probably shut down its Wyoming and Californian oil fields.

It is not the only company suffering.

Fremont Petroleum (ASX:FPL) has shut in its Colorado and Kentucky oil wells, while Abilene (ASX:ABL) has suspended its shares as it talks to lenders about its debt load.

Oil prices have been tumbling since late January when it became apparent daily demand from the world’s biggest oil buyer China, then undergoing severe restrictions on personal interactions and movement to beat the COVID-19 pandemic, had fallen by 20 per cent.

Despite OPEC coming to an agreement last week to reduce production by 9.7 million barrels a day and the US Department of Energy considering paying some producers to keep oil in the ground, the indebted US oil sector is still a very tough place to do business.

Who can survive and who can’t

The US oil sector is a very different place since Stockhead took an inventory of US oil companies’ breakeven prices a year ago, when questions were being asked about businesses surviving $US50 ($79) oil.

Yesterday, in early Asian trading, the US benchmark price West Texas Intermediate (WTI) hit $US14.47 a barrel, the lowest point since 1999, on fears that demand will not recover enough, soon enough to soak up the huge volumes of crude that will max out global storage by May.

Today the question is who can survive sub-$US20 oil in the US.

With Sundance Energy swapping the ASX for the NASDAQ last year, and Elk Petroleum (ASX:ELK) and Freedom Oil and Gas (ASX:FDM) going into administration in 2019, the pool of US-focused oil companies left on the Australian market is limited.

88 Energy (ASX:88E) originally said in mid-2016 its HRZ shale project in Alaska would be feasible to develop at $US27/bbl at the low-cost end up to $US68/bbl, with the mid-case at $US39/bbl.

Australis Oil and Gas (ASX:ATS) says it has hedged 413,000 barrels or about 70 per cent of its 2020 production, from April 1 2020 through to early 2023 at a floor price from $US51 to $US55 per barrel.

Brookside Energy (ASX:BRK) said yesterday the free cash flow breakeven oil price — the number that includes all costs such as leases and corporate — for its Anadarko shale prospects is $US7.50.

Adams says the free cash flow breakeven for Eon NRG is about $US52 a barrel. The company is in talks with its banks and Adams expects them to be lenient across the board, given the price and oversupply pressure the industry is under.

Fremont Petroleum chairman Guy Goudy told Stockhead last year the company could cut exploration costs and survive at $US30. The company has been contacted for comment.

Winchester Energy (ASX:WEL) set out a target in 2017, placing a $15.60 price on its Permian wells.

Stockhead is seeking comment from Otto Energy (ASX:OEL).

It’s unclear at what prices Helios Energy (ASX:HE8) and Abilene break even.

Most won’t survive the great cull

On average in the US, free cash flow breakeven prices are $US40 a barrel, says Morningstar resources analyst Mark Taylor.

It’s this figure, as opposed to operating breakeven, to watch as it indicates how long a company can persist at that price or whether they will face declining production and debt stress as it captures capital costs.

Anastacia Dialynas, who leads US oil analysis at Bloomberg New Energy Finance (BNEF) in New York, says oil producers in the Permian basin, the main shale oil region of the US, average a $US47 breakeven price.

When the bottom fell out of the oil market in 2014 American shale producers, supported by a healthy financial sector, were able to cut costs and discovered they could be significantly more efficient.

Today, when there is more pressure on companies to show positive cash flows, the financial sector is much more reticent to lend.

“A lot have taken on debt in the past. Prices are low, they have eked out a lot of efficiencies already. We do anticipate that it will put a lot of them under pressure,” Dialynas said.

She says companies which have a well-hedged portfolio with floors over $US51 a barrel are in a good way.

US slowly starting to react

While US oil production is not yet significantly below its peak of 13 million barrels per day in March (in early April it was 12.3 million barrels), signs show the sector is beginning to react to the low prices and oversupply.

Eon NRG’s Adams says the transportation price or “deduct” the company pays to refiners for taking its oil has risen from $US5.50 a barrel to $US12 this month. Next month, the company has been told, it could be $US15.

Baker Hughes data shows the US oil drilling rig count has fallen to 438, representing the sharpest contraction since 2010. The number of active rigs in the US has dropped by two thirds in the last week.

A year ago 825 rigs were actively committed for oil drilling.

The rig count is widely considered to be one of the most important indicators of investment appetite by E&Ps. It not only represents the actual drilling activity in the market but is also a key metric of consumer confidence, closely related to price developments, according to market analyst Rystad Energy.

Bankruptcies were already on lenders’ minds late last year, when by October 28 oil and gas producers had filed for bankruptcy as companies struggled to refinance debt taken out when prices were higher and when investors were more confident.

Shale producer Whiting Petroleum Corp was the first casualty of this crisis, filing for Chapter 11 bankruptcy at the end of March.

Rystad Energy analysts say more than 70 US oil and gas operators are likely to be in trouble and unable to meet interest payments at an oil price of $US30 a barrel.

The oil and gas operators in the US, including producers of all sizes, amount to just above 9,000, with most being small, family-owned businesses operating a single-digit number of wells. The top 50 operators controlled 69 per cent of supply last year.

“In a $20 WTI environment, which is close to where we are right now, the number of Chapter 11 cases could reach 140 already this year, increasing to almost 400 in 2021,” wrote Rystad Energy’s head of shale research Artem Abramov.

“In such a scenario almost $250 billion of debt is seen at risk in 2020‒2021. To be exact, our estimates show $70 billion of debt being at risk in 2020 and another $177 billion in 2021.”