US shale industry asset impairments may top $300bn, with significant write-downs expected in the second quarter, raising the prospect of an acceleration in bankruptcies, consultancy Deloitte said today.
A host of key operators including Concho Resources, Hess, Apache and Continental Resources have already announced impairments with first-quarter earnings, totaling billions of dollars amid an unprecedented collapse in crude prices that saw the Nymex WTI contract make an epic tumble to -$37.63/bl on 20 April.
Despite those first quarter announcements, additional significant impairments are expected to hit the industry, Deloitte said. While write-downs are essentially non-cash accounting adjustments, they wipe out shareholders' equity, resulting in an increase in the industry's leverage ratio, the consultancy said. As a result of the impairments, the sector's debt ratio will rise to 54pc from 40pc, potentially triggering more bankruptcies.
Among key public US shale operators, about 30pc are already technically insolvent, as their value with crude at $35/bl is lower than their net liabilities, Deloitte said. The proportion rises to almost 50pc if oil prices average around $20/bl.
Aside from companies that are technically insolvent, another 20pc of operators have stressed financials at an average oil price of $35/bl, and that increases to 25pc at $20/bl.
"All eyes are on this stressed group, as a longer continuation of the current trend would shift many of them to the insolvent group," Deloitte said.
About 25-50pc of operators remain solvent across the two price scenarios, in part due to financial discipline and operational improvements made over the years.
Since 2010, the US shale industry has generated a free cash flow deficit of $300bn and impaired more than $450bn of invested capital, with more than 190 bankruptcies, the report said.
Current conditions could trigger deep consolidation in the US shale industry. Deloitte cautions that an "adventurous" deal may be risky, but staying on the sidelines may not be an option, either.
Operators with a balanced fuel mix or those that reconsider buying gas-heavy fields may be a more effective strategy than the existing approach of focusing on oil, primarily in the Permian, Deloitte said. Despite low natural gas prices since 2012, many gas-heavy operators have maintained a stronger profile than oil-heavy operators, and the recent narrowing of the oil-to-gas price ratio and a prolonged oil price weakness have made the gas-heavy companies more attractive.
