Riches to Rags: How the Oklahoma Oil Shale Bubble Went Bust
From 2011 to 2014, four Oklahoma-based oil shale development companies outspent cash flow by a combined $36.8 billion. This wasn’t a problem as long as high oil prices made refinancing easy. Years of near-zero interest rates had sent investors hunting for returns in riskier corners of the market. Of the 97 exploration and production companies evaluated by Standard & Poor’s in April 2014, 75 had ratings below investment grade. That didn’t scare investors. From 2004 to 2014, the high-yield bond market doubled while the amount issued by junk-rated companies in the industry grew 11-fold to $112.5 billion, according to Barclays. As Stanley Druckenmiller, an investor with one of the best long-term records in money management, said of Texans in January 2015: “Those guys know how to gamble, and if you let them stick a hole in the ground with your money, they’re going to do it.” Shale wasn’t sustaining the frenzy; cheap debt was.
The gamble did not pay off as expected. The oil shale boom that underwrote Oklahoma’s economic recovery was founded on two economic facts, historical low interest rates on commercial loans and a long period of continuing oil price increases. The hoopla over shale oil ignored one fatal flaw in the optimistic scenarios spun by the shale oil promoters: It was one of the most expensive booms in history. Those four Oklahoma companies – Devon Energy , Chesapeake Energy, SandRidge Energy, and Continental Resources – were spending almost $2 drilling for every $1 they earned selling oil and gas, according to a copyrighted story by Asjylyn Loder appearing today on Bloomberg Business. Moreover, the output from shale wells fell far faster than that of traditional wells, as much as 60 percent to 70 percent in the first year alone, which sounds very much like a prescription for disaster for any business.
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