Know When to Fold Them — Energen Corp.

Permian Basin well // Photo courtesy of Energen Corp.

When Alabama-based Energen Corp. disappeared by acquisition about one year ago, it might have been a case of getting out while the getting was good.

The sale of Energen Corp. on Nov, 29, 2018 removed from Alabama one of its largest public companies.

Just days before Alabama’s energy jewel was snapped up by Texas-based Diamondback Energy, the oil and gas territory Energen had been focusing its investment in was proclaimed by the Department of the Interior to be home to one of the largest new oil and gas reserves in the country. Moreover, the shale oil fields of the Permian Basin, in west Texas and New Mexico, where Energen was concentrating its explorations, had put the U.S.’s total reserves at the top of the global scoreboard — 264 billion barrels of oil, compared to Russia’s 256 billion and Saudi Arabia’s 212 billion, according to industry analysts at Rystad Energy.

With such glowing assessments, it seemed Energen would have been better off to hold its bet instead of folding.

But not everything in the oil business is what it seems.

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The U.S. oil shale province that rose so swiftly in the last decade seems headed for a fall.

The U.S. shale oil industry as a whole has yet to turn a net profit. Discovery of new reserves have glutted the world market, pushing down prices. With the high cost of horizontal fracking involved in shale oil production, prices have hovered below the $60 per barrel break even for shale. The 33 U.S. publicly traded shale companies had a combined negative cash flow of $3.9 billion in the first half of 2018.

During that same time, shale companies were misleading investors about how much oil they had in reserves, says Kayrros, a data analytics company. Kayrros found in July that the industry overestimated by 21 percent the number of wells said to be uncompleted and awaiting production, according to the Oil and Gas Journal.

“Oil’s drop to near $55 a barrel, from $75 in October, is putting pressure on shale producers at a time when investors are losing faith in an industry that has burned about $200 billion of cash in a decade,” reported Bloomberg on Sept 4. The S&P index of independent exploration companies was about half of what it was a year before, said Bloomberg.

“Bankruptcies are rising in the U.S. oil patch as Wall Street’s disaffection with shale companies reverberates through the industry,” The Wall Street Journal reported on Sept. 24.

“Twenty-six U.S. oil-and-gas producers, including Sanchez Energy Corp. and Halcón Resources Corp., have filed for bankruptcy this year, according to an August report by the law firm Haynes & Boone LLP,” said the Journal.

And as bankruptcies rise, shale prospects shrink. Oil shale reserves — derived from enhanced extraction of old fields — have a much faster depletion rate than traditional sources.

In August, the CEO of one of the most successful shale oil companies, Scott Sheffield, of Pioneer Natural Resources, warned, “Tier 1 acreage is being exhausted at a very quick rate.”

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