Shale companies may be forced to write down the value of their assets by as much as $300 billion

Deloitte said 30% of shale companies would be “technically insolvent” with oil prices at $35

Shale oil production has more than doubled over the past five to six years

The U.S. shale oil industry is facing massive losses and a wave of bankruptcies as low oil prices continue to pressure the beleaguered energy sector.

Accounting and professional services firm Deloitte said in a report released on Monday that shale exploration and production companies may be forced to write down the value of their assets by as much as $300 billion, with heavy impairments expected in the second quarter.

“The oil industry is currently experiencing a ‘great compression’ in which companies’ room to maneuver is restricted by low commodity prices, reduced demand, capital constraints, debt loads, and health impacts of COVID-19,” Deloitte said in the report. “Unlike in previous downturns, these effects are now simultaneous -- creating a higher level risk of technical insolvencies and building intense pressure on the industry.”

The covid-19 pandemic and related global lockdown sapped demand and crushed oil prices. While oil prices have surged from April lows, they still remain moderate by historical standards and are still not high enough to allow most oil firms to break-even. (West Texas Intermediate crude futures were trading at about $40 per barrel on Monday morning.)

Deloitte estimated that about 30% of shale companies would be “technically insolvent” with oil prices at $35, while another 20% would have “stressed financials” at that price level.

After these heavy losses trigger more business insolvencies, mass consolidation will take place.

“As COVID-19 impacts amplify pressures on shale companies through 2020, a wave of impairments may prompt the deepest consolidation the industry has ever seen over the next six to 12 months,” said Duane Dickson, vice chairman at Deloitte.

Among the most prominent shale operators that have already collapsed was Whiting Petroleum, once a dominant player in the Bakken region. Deloitte expects more bankruptcies across the oil and gas ecosystem in the coming weeks and months.

“The reverberations of the pandemic will extend beyond the U.S. shale industry,” Deloitte warned. “Although U.S. shale [accounts for] less than 10% of global oil and gas production, it accounts for 40% of the global drilling activity and [represents] nearly 100% of the growth in U.S. midstream and export-oriented refining and petrochemical sectors over the past 10 years,” Deloitte declared. “Thus, any major developments in U.S. [shale companies] will likely have a domino effect on the global oil and gas industry.”

But the shale oil industry had its troubles long before the emergence of the pandemic.

Deloitte noted that the U.S. has enjoyed a shale oil boom for 15 years which has granted the country energy independence. Shale oil production has more than doubled over the past five to six years.

“But beneath this phenomenal growth, the reality is that the shale boom peaked without making money for the industry in aggregate,” Deloitte said. “In fact, the U.S. shale industry registered net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital, and saw more than 190 bankruptcies since 2010.”

Then the covid-19 pandemic shattered the entire oil industry in March 2020.

“It’s largely certain that 2020 will be a trying year for the oil and gas industry,” Deloitte indicated. “The big unknown is the post–COVID-19 environment and the Organization of the Petroleum Exporting Countries’ role in balancing oil supplies. Oil demand, however, isn’t expected to return to pre-pandemic levels anytime soon due to the new norm of remote telecommuting, relatively stable and stronger prospects in natural gas, decapitalized and stable business profile of new energies, shortened supply chains, and regionalization of trade.”

Investors have now appeared to shun shale oil firms.

In fact, shale-related bankruptcies have already commenced in earnest.

Last week, Extraction Oil & Gas of Denver, once a powerful name in the industry, filed for bankruptcy after it defaulted on a bond interest payment.

“After months of liability management and careful analysis of our strategic options, we determined that a voluntary Chapter 11 filing with key creditor support provides the best possible outcome for Extraction,” said Extraction chief executive officer Matt Owens.

Extraction produced nearly 100,000 barrels a day of oil equivalent from its shale wells in Colorado’s DJ Basin.

In early June, Haynes and Boone, a Dallas-based law firm, said 19 North American shale oil exploration and production companies had already filed for bankruptcy protection since the start of the year.