Building a world of
resilient communities.

MAIN LIST

 

The Shale Sugar Lick

A well known American comedian, Ron White, quips about the amount of sugar Americans eat by suggesting that certain restaurants install a sugar lick. Patrons can “belly up” and take their fill at the trough. Such an analogy might be apropos of some shale operators with regard to their addiction to debt.

A useful metric when evaluating a company is to look at the ratio between interest expense and operating income. A low ratio means that the company has not needed to borrow great sums of money to keep going. It generates sufficient cash to fund future operations without exorbitant levels of debt or shareholder dilution from issuing more stock.

Examining a selection of shale operators who are active in various plays in the US, one sees an interesting pattern. Perhaps it would be useful to define operating income. Operating income is gross income minus day to day costs of running the business including salaries and then subtracts depreciation. It is a metric that investors use to determine how much potential profit a company might generate. Obviously it gives a more accurate picture of a firm’s profitability than simply gross income because costs have been removed. But not interest expense.

Recently, the oil and gas industry’s appetite for debt has exploded primarily because cash is not being generated by the underlying business proportional to its needs. This is particularly true of some shale operators. EIA, the forecasting arm of the US Department of Energy, quantified this appetite for debt. EIA stated:

“The gap between cash from operations and major uses of cash has widened in recent years from a low of $18 billion in 2010 to $100 billion to $120 billion during the past three years.”

To demonstrate how this phenomenon translates to a company’s financial statement, one need only to examine the ratio between interest expense and operating income. The following chart shows the percentage of total operating income, or potential profit, that is being eaten up by nothing more than interest paid on debt at Range Resources, Devon Energy, Quicksilver Resources, Encana and Exco.

image

Shale operators have, indeed, parked themselves at the sugar lick debt trough for quite some time now. Could debt diabetes be right around the corner?

It is certainly not out of the realm of possibility.

 

Photo credit: Wikipedia/Editor at Large/CC BY-SA 2.5

What do you think? Leave a comment below.

Sign up for regular Resilience bulletins direct to your email.

Take action!  

Find out more about Community Resilience. See our COMMUNITIES page
Start your own projects. See our RESOURCES page.
Help build resilience. DONATE NOW.

 

This is a community site and the discussion is moderated. The rules in brief: no personal abuse and no climate denial. Complete Guidelines.


The Most Important and Misleading Assumption in the World

Why should we make policy using economic models that don’t reflect …

How Can Fossil Fuel Supplies Be Constrained?

Academics gathered in Oxford this week to discuss how to constrain fossil …

As Nations Embrace Paris Agreement, World’s Existing Fossil Fuels Set to Exceed its Goals

Entitled “The Sky’s Limit: Why the Paris Climate Goals Require a …

Naomi Klein & the Let­down of the Leap Manifesto: Poli­tics Doesn't Trump Physics, Nor the Economics of Collapse (part 2/3)

Politics can be egalitarian when going up Hubbert's Curve, but it's a whole …

Carbon Tracker Analysis: ‘Renewables are Already Outcompeting Fossil Fuels’

Clean technologies are already cheaper, on average, than the incumbent …

Timeline: The Past, Present and Future of Germany’s Energiewende

The Energiewende (energy transition) is an internationally recognised …

The Sower's Way: the Path for the Future

Our paper on "The Sower's Way" has been published in the IOP …