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Is U.S. Shale Finally Bottoming Out?

Published 10/27/2015, 07:58 AM
Updated 07/09/2023, 06:31 AM
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Several recent signs point towards a bottoming out in the U.S. shale region, but is this really the best time for investors to jump in?

In preparation for a bi-annual review of credit lines, troubled oil companies struggled to pad their balance sheets by issuing shares or selling assets. It seems some foreign investors thought now was the right time to jump into the fray. A Chinese real estate investment firm, YantaiXinchao, has agreed to purchase shale oil fields in Texas for $1.3 billion from two Nevada companies – Tall City Exploration and Plymouth Petroleum. As readers here know, I have warned against declaring an end to the oil rout – at least until we see major oil companies, especially foreign ones, purchasing assets in the shale oil regions.

Is this Chinese deal the beginning of the end? The answer is no. This purchase says more about the lack of investment opportunity in China’s energy sector than it does about the bottoming out of shale oil. Plymouth Petroleum is owned by the private-equity firm ArcLight Capital Partners and Tall City is backed by another private equity firm, Denham Capital Management. This is simply a transfer of assets owned by two private equity firms to a foreign investment firm that sees more investment opportunity in America than it does in China. We have yet to reach the bottom of the well and we will continue to see further devaluation of shale oil assets.

In fact, shale oil companies recently received a major reprieve which will allow them to continue limping along. As I have mentioned here before, one of the reasons we did not see wholesale bankruptcies amongst shale oil companies after oil prices tumbled was because financial institution kept their lines of credit wide open. In October, these institutions were required to review their lending practices to oil companies and reevaluate their loans.

Analysts expected a bloodbath and estimated that at least 15% of currently available credit would be cut. Instead, lenders have been generous and only cut credit by 2%. This does not mean that shale oil is in the clear, but just kicks the can down the road to spring of 2016. Likely, many oil companies offered additional assets as collateral and agreed to additional restrictions to keep that credit. With many companies able to maintain their credit, you will not see any major declines in U.S. oil production. Instead, the torturously slow rate at which U.S. oil production has declined this year will likely continue through the first part of 2016.

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