And That’s just the beginning….
While the U.S. oil and gas industry struggles to stay alive as it produces energy at low prices, there’s another huge problem just waiting around the corner. Yes, it’s true… the worst is yet to come for an industry that was supposed to make the United States, energy independent. So, grab your popcorn and watch as the U.S. oil and gas industry gets ready to hit the GREAT ENERGY DEBT WALL.
So, what is this “Debt Wall?” It’s the ever-increasing amount of debt that the U.S. oil and gas industry will need to pay back each year. Unfortunately, many misguided Americans thought these energy companies were making money hand over fist when the price of oil was above $100 from 2011 to the middle of 2014. They weren’t. Instead, they racked up a great deal of debt as they spent more money drilling for oil than the cash they received from operations.
As they continued to borrow more money than they made, the oil and gas companies pushed back the day of reckoning as far as they could. However, that day is approaching… and fast.
According to the data by Bloomberg, the amount of bonds below investment grade the U.S. energy companies need to pay back each year will surge to approximately $70 billion in 2017, up from $30 billion in 2016. That’s just the beginning…. it gets even worse each passing year:
As we can see, the outstanding debt (in bonds) will jump to $110 billion in 2018, $155 billion in 2019, and then skyrocket to $230 billion in 2020. This is extremely bad news because it takes oil profits to pay down debt. Right now, very few oil and gas companies are making decent profits or free cash flow. Those that are, have been cutting their capital expenditures substantially in order to turn negative free cash flow into positive.
Unfortunately, it still won’t be enough… not by a long-shot. If we use some simple math, we can plainly see the U.S. oil industry will never be able to pay back the majority of its debt:
Shale Oil Production, Cost & Profit Estimates For 2018
REVENUE = 5 million barrels per day shale oil production x 365 days x $50 a barrel = $91 billion.
EST. PROFIT = 5 million barrels per day shale oil production x 365 days x $10 a barrel = $18 billion.
If these shale oil companies do actually produce 5 million barrels of oil per day in 2018, and were able to make a $10 profit (not likely), that would net them $18 billion.
However, according to the Bloomberg data, these companies would need to pay back $110 billion in debt (bonds) in 2018. If they would use all their free cash flow profits to pay back this debt, they would still owe $92 billion.
Yes, it is true, I am not including all U.S. oil and gas production, but I am just trying to make a point here. We must remember, this debt is below investment grade and is likely more of the shale oil and gas producers. Furthermore, these shale oil and gas producers are using most of their free cash flow to drill more wells to produce more oil. So, in all reality, they would not take most all of their profits or free cash flow to pay down debt. They just wouldn’t have the funds to continue drilling.
The Bloomberg data on the U.S. oil and gas companies outstanding debt (bonds) came from the following chart:
I made my own chart (shown at the top of the article) by estimating Bloomberg’s debt figures (they did not provide actual figures) as it seemed more fitting to show U.S. energy debt in a BRIGHT RED color. Their chart seemed a tad boring, so I thought it would be nifty to jazz it up a bit. While I have reproduced their data in my own chart, I give them full credit for the figures.
That being said…. there is no way in hell the U.S. oil and gas companies are going to be able to pay back this debt. NO WAY…. NO HOW. So, we could either see a lot more bankruptcies, companies rolling over the debt to a later date, or Uncle Sam could come in and buy the debt. However, all these options won’t change the dire situation the U.S. energy sector will face as it becomes more difficult and less profitable to produce oil and gas in the future.
I would kindly like to remind all the precious metals investors as well as those who follow the alternative media…. ENERGY IS THE KEY PROBLEM…. not the debt. The debt is a symptom of the Falling EROI of energy. For some strange reason, a lot of people still don’t get that. We must remember the following:
DEBTS = UNBURNED ENERGY OBLIGATIONS
For example, a home mortgage is a debt owed by the homeowner. Energy must be burned every day, week, month and year(s) to create the economic activity that pays the homeowner a salary to pay off the home mortgage over the 20-30 year period. Thus…..
HOME MORTGAGE = UNBURNED ENERGY OBLIGATION
Now, I can go on and on by using other examples such as car loans, boat loans, RV loans, credit cards, second mortgages, company and public debt. All of these debts are “Unburned Energy Obligations.” When you can finally look at the market in the terms of “ENERGY”, and not “FIAT MONEY”, “ASSETS” or “DEBTS”, then you will finally understand why the debt is not the real problem.
Why? Because, even if we could get wipe away all the debt, that would still not solve the Falling EROI – Energy Returned On Investment of our oil and gas sources or the declining net energy that is available to the market. The massive increase in debt has just postponed the inevitable a while longer.
Lastly, precious metals investors who “wrongly assume” that falling oil and natural gas production is bad for gold and silver investments or stores of wealth, you are sadly mistaken. Gold and silver have been providing a store of wealth for 2,000+ years before oil and natural gas came onto the world market. Precious metals were storing mostly economic energy of human and animal labor (as well as capital created from human and animal labor).
So, when oil and natural gas production really starts to decline, the value of most STOCKS, BONDS & REAL ESTATE (where 99% of investors have their money tied up) will implode. Thus, only a 1% movement of that wealth into gold and silver will push them to values never seen before in history.
I will be publishing some very interesting articles over the next few weeks and I am doing preliminary work on a new PAID REPORT on Bitcoin, Gold & Silver. There is a lot about these assets-investments that most people do not understand.