Tyler Durden on Zero Hedge: “One of, if not the biggest contributors to the improving US trade deficit and thus GDP (not to mention labor market in select states) over the past several years, has been the shale revolution taking place on US soil, which has led to unthinkable: the US is now the biggest producer of oil in the world, surpassing Saudi Arabia and Russia. Which is great today, but what about tomorrow?”
“It is here that problems emerge according to Bloomberg’s snapshot of the shale industry. In “We‘re Sitting on 10 Billion Barrels of Oil! OK, Two“, the authors look at the two-tiers of reporting when it comes to deposits that America’s fracking corporations allegedly sit on, and find something unpleasant:
…. Sixty-two of 73 U.S. shale drillers reported one estimate in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg.
….Fracking 101: “Predicting how much oil can be pumped out of shale has been controversial since the boom began about a decade ago. Companies combined horizontal drilling with fracking, or hydraulic fracturing. Fracking involves blasting water, sand and chemicals into deep underground layers of shale rock to free hydrocarbons. Innovators such as Oklahoma City-based Chesapeake Energy Corp. (CHK) said that drilling vast expanses of oil-soaked rock formations is more predictable than the traditional, straight-down method of exploration. Regulators agreed and requirements were loosened starting in 2010.”
Furthermore, as tech companies have non-GAAP to hide all the nasty “expense” stuff, energy companies rely on probable and possible.
….Now the discrepancy between the two estimation methodologies is hardly new: every serious investors in the E&P space has known about the two-tier bookkeeping system for years. The problem, however, is well laid out by John Lee, one of University of Houston petroleum engineering professors for hire: “They’re running a great risk of litigation when they don’t end up producing anything like that. If I were an ambulance-chasing lawyer, I’d get into this.”
The reason why no ambulances were chased for the past 6 years, ever since the shale boom truly took off, is that this roughly corresponds to the time when the Fed unleashed its QE on the world, and boosted stock prices to record levels across the board, including those of shale plays. As a result, since fracking investors saw their stocks also rise to record highs, they had no reason for complain, even if the surge in market cap may have had little to do with the actual underlying fundamentals, among which level of reserves, and everything to do with a very different type of liquidity, that emerging from the Fed’s printer.
But now things are rapidly changing, the commodity space is getting, pun intended, fracked, E&P companies across the board are sliding, and as of today, the shale space just entered a bear market.
And since investors take to losses with far less enthusiasm and stoic patience than paper profits, artificial as they may have been, they will soon start looking for scapegoats. They will find these were right in front of their eyes. To wit:
Additionally, here is what the above mentioned ambulance chasers will be closely looking at in the coming weeks and months unless the shale stock plunge doesn’t reverse quickly.
….The SEC is keeping mum, realizing very well that it is suddenly sitting on the next powder keg:
And this is where companies have gotten into hot water: “Many of the companies use their own variation of resource potential, often with little explanation of what the number includes, how long it will take to drill or how much it will cost. The average estimate of resource potential was 6.6 times higher than the proved reserves reported to the SEC, the data compiled by Bloomberg News show.”
This is the E&P equivalent of annualized, pro-forma, adjusted EBITDA, a metric that is fully made up on the spot to exclude anything and everything and make the subject look more attractive. In other words, lipstick on a pig.
It is also known as the “Bill Gross effect”: everything was great as long as he was making money. And then things all hell broke loose.
….The one message that is not getting through, however, is that no matter if Obama endorses one reserve estimation metric or another, if and when the P&L crash comes, nobody will be able to stop the onslaught of lawsuits that will immediately hone in on the weakest link, which in this case is clearly the ambiguous and two-tiered public data.
….Actually, considering the gross incompetence of the SEC, the corrupt, co-opted regulator (for hire) may do something… in just about a decade. In the meantime, the most vibrant US industry may go from boom to bust in a heartbeat, as soon as its is mired in litigation once shareholders realize that the stock gains of the past half-decade will not continue in perpetuity. One look at the shale index chart above and the alarm bells should be going off.”
Future Today
