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Cheap Oil: Uncompetitive Shale Companies Braced For Bankruptcies

Ed Crooks, Financial Times

Falling oil prices put groups with high costs under severe financial strain

The world may run on oil, but the oil industry runs on capital, and for US shale producers that capital is starting to dry up.Earlier in the year it was still relatively easy for US exploration and production companies to raise capital by selling debt or equities, in spite of last year’s oil price crash caused by a global glut. Now those sales have slowed sharply, and the financial strain on the industry is growing.

The shale industry, which has been responsible for rapid growth in US oil production since 2009, is not about to die. There are plenty of strong companies that have healthy balance sheets, low costs, or both, and they should be able to ride out the downturn. But there are very wide differences in resilience between companies. Those with high costs or high debts, or both, face a turbulent future.

“In retrospect, easy money and a difficult time for finding the right thing to invest in led to an overshoot in US [oil] production growth,” says Edward Morse, global head of commodities research at Citigroup. “Companies that should never have been brought to life were brought to life.”

Now that overshoot is heading for a correction. Analysts expect a wave of asset deals, acquisitions and corporate bankruptcies, as weaker companies struggle to avoid collapse, not always successfully.

Already 16 US oil production companies have defaulted this year, according to Standard & Poor’s, the rating agency.

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