Fracking claims another victim

[GliderGuider]

Shale Oil Boom Breaking Down

Recent research suggests that fracking causes earthquakes; they have no doubt of that at the fourth largest trading and investment company in Japan — Sumitomo Corporation — which has just experienced a Magnitude 10. The profit Sumitomo expected to make this year, a hefty $2.27 billion, has been all but wiped out. News of the disaster atomized 13 per cent of its stock value in one day. Its credit rating went to “negative.” And almost all of this was caused by hideous losses incurred in fracking for tight oil in Texas.

Sumitomo samurai rolled into Texas just two years ago (seems like only yesterday) with a $2 billion dollar investment in the Permian shale-oil play, in partnership with Devon Energy of Oklahoma. So here we have Japan’s fourth-largest trading company, along with one of the largest US fracking companies, going into the (potentially, according to the oil interests) richest tight-oil basin in the United States in the midst of a tight oil boom. What could possibly go wrong?

What Sumitomo missed, as its investigating committee may or may not figure out, is that fracked wells are not at all like normal oil wells: they are twice as expensive to set up, many times more expensive to operate, and run out 10-20 times faster. The simple fact is that the wells are not paying for themselves. They look like they are going to, in their first year, but by the third or fourth year it’s clear that they are not going to. (For a devastating explanation of this point by the former head of research for a London money broker, see “Shale Gas: The Dotcom Bubble of Our Times.”)

Sumitomo is not alone in its mystification. Itochu Corporation, Japan’s third largest trading company, has written off 80 percent of a nearly $80 million investment in a US fracking company. And then there is Shell, which took a $2 billion hit last August as punishment for its shale-oil and -gas enthusiasm, and this year bailed out of a business in which it had been one of the largest players.

[GitRDun]

1. This has been a known fact in the industry for a long time

If you are not in the sweet spot, the wells don't pay out. Greater fool is correct.

Athlon has been buying up vertical wells in the Permian Basin to put together a big horizontal play. The value they pay is a lot more than the value of the vertical well's production.

Athlon buys up assets. See the Barclay's presentation here. Located in webcasts and presentations link. Lots of acquisitions.
http://www.athlonenergy.com/


Encana moves in and buys Athlon for $7 billion.
http://www.naturalgasintel.com/articles/99862-encana-newest-permian-player-with-7b-athlon-deal

Meanwhile, most of the small independents, who survive on positive cash flow from their operations, stay away.

[pscot]

2. I've read that the natual gas bidness

financial arrangements are even dicier.

[Nihil]

3. Somebody got very rich and some bodies are going to get very "job-poor".

> The profit Sumitomo expected to make this year, a hefty $2.27 billion, has been
> all but wiped out. News of the disaster atomized 13 per cent of its stock value in one day.
> Its credit rating went to “negative.”

Excellent news! Shame that the first-in/first-out capitalists have coined a very nice
profit off this disgracefully exploitative & polluting industry but at least some of the
subsequent supporters have bitten a tasty bullet.

> Itochu Corporation, Japan’s third largest trading company, has written off 80 percent
> of a nearly $80 million investment in a US fracking company.
> And then there is Shell, which took a $2 billion hit last August

Burn baby burn.


I also like the straightforward explanation in the linked article:

> Every Ponzi scheme and bubble is based on the Greater Fool hypothesis of investing,
> which is that the real value of the assets you’re buying don’t matter as long as you can find
> a greater fool, someone who knows even less about the assets than you do, who will
> buy them from you. When you run out of fools, the market crashes.

Special mention for a classic phrase:
> With Sumitomo bailing now — that is, selling its leases — the search for the next
> greater fools is becoming really intense. They are going to experience peak fools very soon.