Fracking in 2018: Another Year of Pretending to Make Money
By Justin Mikulka, December 18, 2018

2018 was the year the oil and gas industry promised that its darling, the shale fracking revolution, would stop focusing on endless production and instead turn a profit for its investors. But as the year winds to a close, it's clear that hasn't happened.

Instead, the fracking industry has helped set new records for U.S. oil production while continuing to lose huge amounts of money — and that was before the recent crash in oil prices.

But plenty of people in the industry and media make it sound like a much different, and more profitable, story.

(snip)

Shale Oil Industry 'More Profitable Than Ever' — Or Is It?

However, Reuters recently analyzed 32 fracking companies and declared that “U.S. shale firms are more profitable than ever after a strong third quarter.” How is this possible?

Reading a bit further reveals what Reuters considers “profits.”

“The group’s cash flow deficit has narrowed to $945 million as U.S. benchmark crude hit $70 a barrel and production soared,” reported Reuters.

So, “more profitable than ever” means that those 32 companies are running a deficit of nearly $1 billion. That does not meet the accepted definition of profit.

A separate analysis released earlier this month by the Institute for Energy Economics and Financial Analysis and The Sightline Institute also reviewed 32 companies in the fracking industry and reached the same conclusion: “The 32 mid-size U.S. exploration companies included in this review reported nearly $1 billion in negative cash flows through September.”

(snip)

The numbers don’t lie. Despite the highest oil prices in years and record amounts of oil production, the fracking industry continued to spend more than it made in 2018. And somehow, smaller industry losses can still be interpreted as being “more profitable than ever.

(snip)

Wall Street Continues to Fund an Unsustainable Business Model

Why does the fracking industry continue to receive more investments from Wall Street despite breaking its “promises” this year?

Because that is how Wall Street makes money. Whether fracking companies are profitable or not doesn’t really matter to Wall Street executives who are getting rich making the loans that the fracking industry struggles to repay.

An excellent example of this is the risk that rising interest rates pose to the fracking industry. Even shale companies that have made profits occasionally have done so while also amassing large debts. As interest rates rise, those companies will have to borrow at higher rates, which increases operating costs and decreases the likelihood that shale companies losing cash will ever pay back that debt.

Continental Resources, one of the largest fracking companies, is often touted as an excellent investment. Investor's Business Daily recently noted that “[w]ithin the Oil & Gas-U.S. Exploration & Production industry, Continental is the fourth-ranked stock with a strong 98 out of a highest-possible 99 [Investor's Business Daily] Composite Rating.”

And yet when Simply Wall St. analyzed the company’s ability to pay back its over $6 billion in debt, the stockmarket news site concluded that Continental isn’t well positioned to repay that debt. However, it noted “[t]he sheer size of Continental Resources means it is unlikely to default or announce bankruptcy anytime soon.” For frackers, being at the top of the industry apparently means being too big to fail.

As interest rates rise, common sense might suggest that Wall Street would rein in its lending to shale companies. But when has common sense applied to Wall Street?

Even the Houston Chronicle, a major paper near the center of the fracking boom, recently asked, “How long can the fracking spending spree last?”