US Drillers Drowning In Debt

$CLR, $XOM, $

US tight (shale) Oil drillers are allotting more revenue than ever to interest payments bank lenders and bond holders.

Continental Resources Inc.(NYSE:CLR), the company credited with making North Dakota’s Bakken Shale spent almost as much as Exxon Mobil Corp.(NYSE:XOM), a company 20X its size.

The burden is becoming heavier after Crude Oil prices fell 43% in the past year.

Interest payments are eating up more than 10% of revenue for 27 of the 62 drillers in the North America Independent Exploration and Production Index. Drillers’ debt ballooned to $235-B at the end of Q-1, a 16% increase in the past year as revenue shrank.

The Big Q: how long do they have before they are swallowed up?

The problem for shale drillers is that they have spent money faster than they have made it, even when Crude Oil was 100 bbl. The companies in the index spent $4.15 for each Dollar earned selling in Q-1, up from $2.25 a year earlier, at the same time driving production to the highest marks in more than 30 yrs.

Almost $20-B in bonds issued by the 62 companies are trading at distressed levels, with yields more than 10 percentage points above US Treasuries, as investors demand much higher rates to compensate for the risk that obligations will not be repaid.

So far this year, S&P lowered the outlook or downgraded the credit of almost 50 of the 105 US exploration and production companies that it rates, according to a May report.

Companies have reduced spending to cope with lower prices, but those cuts will eventually lead to production declines, further damaging revenue.

US Crude Oil production will begin to fall this month and will continue to slide until early Y 2016 as shale drillers reduce spending, the Energy Information Administration said in a 9 June.

Interest on debt draining many company’s finances.

At this time last year, Resources Inc. (OTCMKT:KWKAQ) was spending more than 20% of its revenue on interest. The company missed a debt payment in February and has since filed for bankruptcy.

Representatives of Quicksilver did not return calls seeking comment.

Oil & Gas companies accounted for 33% of the 36 corporate debt defaults worldwide this year, and missed interest payments are the leading cause of default, according to a May 14 S&P report.

The financial troubles of the smaller companies get bigger with lower Crude Oil prices.

Have a terrific weekend.