U.S FRACKING OIL INDUSTRY IN TROUBLE: Investors Losing Faith??

by Steve St. Angelo, SRSrocco:

Even though U.S. shale oil production continues to reach new record highs, investors might be finally losing faith in the industry that just isn’t profitable.  A perfect example of this, legendary oil trader Andy Hall, known as “God” in the industry, is shutting down his main hedge fund.  Hall, who is a noted bull in the oil market, saw his hedge fund, Astenbeck Master Commodities Fund II, lose 30% in the first half of 2017.

While Hall’s hedge fund likely lost money betting that oil prices would rise, the entire energy complex took a beating last week, even though oil and natural gas prices increased.   According to the article, Oil Has A Crisis Of Faiththe situation in the U.S. E&P energy sector took a turn for the worst:

If tumbling oil and gas prices aren’t the obvious reason for the sell-off in E&P stocks, then what is?

The likeliest culprit is fear that, even if oil prices aren’t falling further, they are low enough to affect E&P firms’ growth plans — as evidenced in guidance given on a number of quarterly earnings calls this week and last.

One of the biggest losers this week has been Pioneer Natural Resources Co., down 16.5 percent since reporting results on Tuesday evening. Part of the reason it was clobbered so badly is that while it merely trimmed its overall growth rate, it sharply cut its guidance for how many more barrels of higher-value oil it will produce this year. Pioneer blamed this on problems it had with what it called “train-wreck” wells suffering from changes in pressure and the amount of water coming up, forcing the company both to delay its drilling schedule and spend more to strengthen wells.

As we can see in the chart above, all types of energy stocks sold off even though the price of oil increased.  In addition, Pioneer Resources stock price is now down nearly 17% since their second quarter news release:

Pioneer Resources is one of the larger players in the Permian oil basin in Texas.  According to the data put out by Gurufocus.comPioneer suffered a negative Free Cash Flow of $155 million Q1 and $252 million in Q2.  Actually, Pioneer spent a great deal more on capital expenditures (CAPEX) in the second quarter of 2017, by investing $731 million versus $519 million in the first quarter.

Which means, Pioneer spent $212 million more on CAPEX in the second quarter, only to suffer a larger negative free cash flow of nearly $100 million more versus the previous quarter.  Of course, this makes perfect sense in our TOTALLY INSANE business world today to spend $212 million on CAPEX only to lose an additional $100 million in free cash flow.

Another large oil player in the Permian, Occidental Petroleum, lost $300 million in its core upstream U.S. segment.  The upstream segment of an oil company’s earnings comes from its oil and gas wells.  Downstream is the selling of its petroleum products in retail markets and etc.  Not only did Occidental lose $300 million in its domestic U.S. upstream earnings in Q2, it also lost $191 million in the first quarter.

Big 3 U.S. Oil Companies Still Struggling Even With Higher Oil Prices

The Big Three U.S. Oil companies have also suffered losses in their U.S. upstream earnings. Exxonmobil lost $201 million and Chevron lost $22 million in the first half of 2017 in its U.S. upstream earning segment.  ConnocoPhillips lost $2.7 billion in its U.S. earnings segment during the first half of 2017, however this was mostly due to a huge impairment write-down.

Regardless, no one is really making money producing oil and gas in the United States.  While some of these companies may now be reporting positive free cash flow, this has been mainly due to the huge cutting of their of CAPEX spending.  For example, these top three U.S. oil companies were spending a great deal more on CAPEX in 2013 than they will in 2017:

Top 3 CAPEX Spending (Exxonmobil, Chevron & ConnocoPhillips):

2013 = $86.6 billion

2017 Est. = $31 billion

These top three U.S. oil and gas majors will reduce their CAPEX spending by $55.6 billion in 2017 compared to 2013.  This is a decline of two-thirds in CAPEX spending in just four years.  When a company drastically cuts its CAPEX spending, it becomes easier to make free cash flow.  However, by cutting their capital expenditures by two-thirds, these U.S. oil majors will not be adding much in the way of new discoveries or additional oil production in the future.

Moreover, Occidental Petroleum, the largest oil producer in the Permian, enjoyed decent free cash flow during the second quarter of 2017.  However, a large percentage of their $1 billion in free cash flow was due to a NOL- Net Operating Loss adjustment of $737 million.   Occidental actually suffered a negative free cash flow of $111 million in the first quarter of 2017.

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