“The Next Financial Crisis Lurks Underground” The New York Times, Opinion By Bethany McLean

“The Next Financial Crisis Lurks Underground: Fueled by debt and years of easy credit, America’s energy boom is on shaky footing”

By Bethany McLean, Opinion in The New York Times 9/1/18

Please read the entire opinion piece which contains a large amount of financial data to support Ms. McLean’s opinion.
Here are some excerpts:

“Some of fracking’s biggest skeptics are on Wall Street. They argue that the industry’s financial foundation is unstable: Frackers haven’t proven that they can make money. ‘The industry has a very bad history of money going into it and never coming out,’ says the hedge fund manager Jim Chanos, who founded one of the world’s largest short-selling hedge funds. The 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses. In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter.”

“Amir Azar, a fellow at the Columbia University Center on Global Energy Policy, calculated that the industry’s net debt in 2015 was $200 billion, a 300 percent increase from 2005. But interest expense increased at half the rate debt did because interest rates kept falling. Dr. Azar recently called the post-2008 era of super-low interest rates the ‘real catalyst of the shale revolution.’”

“And yet only five of the top 20 fracking companies managed to generate more cash than they spent in the first quarter of 2018. If companies were forced to live within the cash flow they produce, American oil would not be a factor in the rest of the world, an investor told me.”

“For a long time, the public markets have been valuing fracking companies not based on a multiple of profits, the standard way of valuing a company, but rather according to a multiple of the acreage a company owns. As long as companies are able to sell stock to the public or sell themselves to companies that are already public, everyone in the chain, from the private equity funders to the executives, can continue making money.”

“It’s all a bit reminiscent of the dot-com bubble of the late 1990s, when internet companies were valued on the number of eyeballs they attracted, not on the profits they were likely to make. As long as investors were willing to believe that profits were coming, it all worked — until it didn’t.”