In a summary of a technical analysis he co-authored for Carbon Tracker Initiative, blogger Gerard Wynn points to U.S. shale gas companies that will be vulnerable if crude oil places stay around $50 or lower.
West Texas Intermediate crude has been trading above $60 in the last 24 hours, but analysis earlier this year suggested 40% of shale producers could default on their financial obligations due to mounting debt, falling prices, and weak demand for their product. “Investors should be aware that these relatively high-cost producers have still not felt the full effect of collapsing commodity prices,” Wynn warns.
After reviewing the hedging contracts that key shale producers have used as protection against volatile markets, Wynn concludes that some of them may be in trouble, even before the contracts expire later this year. “At sustained oil prices below around $50 a barrel, some companies such as Whiting Petroleum would approach debt covenants agreed under their senior credit facilities,” he writes. “Chesapeake appeared sensitive to oil prices below $50 coupled with gas prices below $2.25 per mcf.”
For now, the sector is receiving record amounts of investment capital. But “these covenants are lines which creditors expect companies not to cross,” he explains. “This was a static, illustrative analysis. In the real world, options for evasive action not to exceed covenants would include capital raisings, or a re-negotiation with creditors. But the findings illustrated their sensitivity to lower oil and gas prices.”