Hydraulic fracturing has a shaky financial future, writes author of new book about the industry - Entrepreneur Generations

Hydraulic fracturing has "turned the energy world upside down" in the 10 years it's been practiced in earnest, turning the U.S. into the world's largest producer of natural gas, but some Wall Street forecasters worry that the industry is financially unstable. Specifically, frackers haven't proven that they can make money, Bethany McLean writes for The New York Times. "The 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses," writes McLean, author of a new book about the fracking industry. "In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter."

Part of the reason is that fracked oil wells produce far less after the first year of operation. "According to an economist at the Kansas City Federal Reserve, production in the average well in the Bakken [Formation] — a key area for fracking shale in North Dakota — declines 69 percent in its first year and more than 85 percent in its first three years," McLean writes. "A conventional well might decline by 10 percent a year. For fracking operations to keep growing, they need huge investments each year to offset the decline from the previous years’ wells."

Fracking companies were able to get off the ground because of record-low interest rates after the Great Recession, and have survived because investors are still willing to buy in, buoying an industry bogged down by increasing debt, McLean writes. Hedge fund manager Jim Chanos told McLean that "the industry has a very bad history of money going into it and never coming out."

Only five of the top 20 fracking companies made more money than they spent in the first quarter of 2018, mostly because of wells mining the oil-rich Permian Basin in West Texas and Southeast New Mexico. Most companies' market value is based on profits, but fracking companies' market value is based on the acreage they own — their potential profit, in other words. "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," McLean writes. "As long as investors were willing to believe that profits were coming, it all worked — until it didn’t."

McLean's new book, Saudi America: The Truth About Fracking and How It's Changing the World (Columbia Global Reports, $15.19) comes out Sept. 11.

from The Rural Blog https://ift.tt/2NPnCoP Hydraulic fracturing has a shaky financial future, writes author of new book about the industry - Entrepreneur Generations

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