Shale gas drilling costs have become the tormentors of oil and gas exploration and drilling companies in the recent past. Indeed, these companies are spending more money to get the precious commodity from the shale, only to realize later that they would need to get funds from external sources to finance the projects.
The increasing costs of mining shale oil has affected several balance sheets, including both the big players and the small ones. Actually the big players are the ones who have exposed their balance sheets to excessive credit, as they seek to increase their earnings to match those of other companies from around the world. Some the U.S big players include Exxon Mobil Corporation (NYSE:XOM) and Chesapeake Energy Corporation (NYSE:CHK).
In his first-quarter letter to investors of Greenlight Capital, David Einhorn lashed out at regulators. He claimed that the market is "fractured and possibly in the process of breaking completely." Q1 2021 hedge fund letters, conferences and more Einhorn claimed that many market participants and policymakers have effectively succeeded in "defunding the regulators." He pointed Read More
The Energy industry has also attracted some activist investors in the likes of Carl Icahn, Daniel Loeb, and David Einhorn among others, with the former two holding large stakes in Chesapeake Energy Corporation (NYSE:CHK), while the latter two more than 18% and 36% respectively, in BioFuel Energy Corp. (NASDAQ:BIOF).
According to a report published on The Street, by Antoine Gara, oil and gas exploration companies in the U.S are spending far more cash than the the amount they have in their coffers, and the excess spending, as obtained from Guggenheim Securities data, is estimated to be approximately 43% over and above their cash flows.
This excessive funding gap could create a terrible predicaments for onshore shale gas mining companies, like Halliburton Company (NYSE:HAL); the Houston TX-based oil and gas company spent $869 million in capital investments, during the most recent quarter, bringing the total for the first half in 2012 to just over $1.6 billion. This was way above its net income for the same period, which stood at just over $1.5 billion.
Another company, that could be exposing its balance sheet to more credit in its shale rigging projects is Chesapeake Energy Corporation (NYSE:CHK), which spend nearly $1.3 billion in capital expenditure during Q2, as compared to a net income of $972 million. However, the largest U.S. oil and gas exploration company Exxon Mobil Corporation (NYSE:XOM) put out the most in capital expenditure, after spending more than $8.3 billion in Q2, but unlike the others, it reported a net income of $15.9 billion, almost double its capital expenses. Nonethelss, it reported a net cash outflow of $868 million.
Gara says, “many large shale players aren’t oil giants with fortress balance sheets, but often smaller drillers that have been using low interest rates and a high-yield debt boom to finance drilling programs and rig contracts.” This, he believes, must change now, as the companies may need to start closing some of these shale rigging projects in anticipation of raising debt ratios and spending deficits in order to conserve capital.
This would ceonsequently put pressure on rental pricing and usage; recently, we featured an article highlighting a scenario where Chesapeake Energy Corporation (NYSE:CHK) was facing allegations of shifting some of the costs to landowners, through royalty payments.
Oil and exploration companies have been acquiring and breaking ground at alarming rate, as we have covered in several articles, detailing land acquisition deals and commissioning between companies, most notably, Chesapeake Energy Corporation (NYSE:CHK) and OGE Energy Corp. (NYSE:OGE), who inked a 15 year deal for the same course (oil and gas drilling project).
While the industry remains lucrative due to the essential nature of the commodity, companies could become their own undoing as they rush for the diminishing deposits across the globe. Excessive gearing, will result in increased interest and expenses, hence reducing the value of reported earnings, and capital retention.