Bethany McLean: US Fracking "Revolution" An Illusion Produced By Cheap Debt; Now, The Reckoning

[hatrack]

Bethany McLean, btw, is one of the two reporters who exposed Enron back in 2001-02.

EDIT

Policymakers who wanted to tout energy independence disregarded all this, even as investors were starting to lose patience. As early as 2018, some investors had begun to tell companies that they wanted to see free cash flow, and that they were tired of compensation models that rewarded executives with rich paydays for increasing production, but failed to take profits into account. As a result, fracking stocks badly underperformed the market.

But with super-low interest rates, investors in search of yield were still willing to buy debt. Over the past 10 years, the entire energy industry has issued over $400 billion in high-yield debt. “They subprimed the American energy ecosystem,” says a long time energy market observer.

Even as the public equity and debt markets grew cautious, drilling continued. That’s because one big source of funding didn’t dry up: private equity. And why not? Private equity financiers typically get a 2 percent management fee on funds they can raise, so they are incentivized to take all the money that pension funds, desperate for returns to shore up their promises to retirees, have been willing to give them.

In the Haynesville and the Utica Shales, two major natural gas plays, over half of the drilling is being done by private equity -backed companies; in the oil-rich Permian basin, it’s about a quarter of the drilling. From 2015 through 2019, private equity firms raised almost $80 billion in funds focused mostly on shale production, according to Barclays. Until the capital markets began to get suspicious, private equity investors could flip companies they had funded to larger, public companies, making a profitable exit regardless of whether or not the underlying business was making money.

EDIT

https://www.nytimes.com/2020/04/10/opinion/coronavirus-texas-fracking-layoffs.html

[captain queeg]

1. One more bubble collapsing. This is all adding up to be way worse than 2008

I was lucky back then, at least I didn’t lose my job. I guess it’s all perspective; for me the early 80s were the worst job wise. I think this will be much worse.