This article, https://seekingalpha.com/article/4084591-new-darlings-wall-street-folly-oil-fracking-investing, reads….“Unlike the two previous US-made financial bubbles (dot-com and real estate), the ‘frackers bubble’ is having meaningful positive economic effects on the rest of the world, through lower imports and improved international trade balances”.
This all important story in the wake of Trump’s live energy unleashing press release yesterday explains why frackers have a negative net present value …aka…they cannot extract oil at a profit even with the advances in fracking efficiencies.
Additionally with seismic risks in mind, “….there are also some other technical disadvantages coming from the efficiency gains. As lateral wells have lengthened, the amount of water recovered from the wells has also increased. On average, between 6 and 8 barrels of water are recovered from 1 barrel of oil (the Permian basin has one of the highest ratios). It means that, if you start from the oil production in the Permian as of today (around 2.3 million of barrels/day), the daily amount of water to be disposed in a safe place is around 14 million barrels, which is a considerable amount. And as production grows, it would not be a surprise to see how producers struggle to find proper places to dispose such quantities”. Maybe before they dispose of it they could at least sell the energy from the brine heat to the grid?
This article sites a company called Diamondback who fracks exclusively for oil to explain the general predicament of the other frackers…..“Despite (Diamondback) being a top-notch producer with the best possible acreage, the company has not been able to generate any cash flows for its shareholders. Even when the oil was around $100 in the good old days of 2013 and 2014 and the company was also able to realise a juicy $4/mcf of gas, it did not generate positive FCF because of the high levels of investment. ‘We are investing for the future’ is the usual answer from the frackers when questioned about such high levels of investment. We will see the same path in other oil producers in a while.
Because the company has burned $4.9B of cash over the period (a staggering amount, by the way, for such a small producer), the arithmetic says that that money must have come from somewhere: in this case, the table shows that the company has been able to tap almost $4B from the equity markets over the whole period. The company closed the 1Q’17 with a net debt of $3.1B, which has been refinanced by its creditors in the past.
But this post is not an investment case to short Diamondback”.
Ready to short the frackers?
Never forget the housing bubble shorts which resulted in the informative movie called, “The Big Short”.