Frackers Drill for Cash Elsewhere After Wall Street Exits

Summary

Podcast Summary: WSJ Your Money Briefing

Episode: Frackers Drill for Cash Elsewhere After Wall Street Exits
Date: June 10, 2019
Host: J.R. Whalen
Guest: Rebecca Elliott, Wall Street Journal Energy Reporter

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Episode Overview

This episode of “Your Money Briefing” examines the shifting funding landscape for U.S. fracking (shale) companies. As investor patience with low or negative profits has waned, Wall Street has largely scaled back direct funding. The discussion, featuring WSJ energy reporter Rebecca Elliott, explores how fracking firms are adapting to tightened financial conditions—by seeking alternative sources of capital, ranging from asset sales to creative partnerships.

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Key Discussion Points & Insights

1. Fracking’s Rise and Current Standing

• Background: Fracking and horizontal drilling massively increased U.S. oil output in the past decade, making the U.S. the world leader in oil production.

  • Rebecca Elliott (03:07):
    “Fracking and horizontal drilling have really helped propel U.S. production in the last decade. And so right now, U.S. oil production is at about 12 million barrels a day, which is an all time high, and it's made the US the top oil producer in the world.”

• What is Fracking?

  • Elliott (03:36):
    “Fracking is a process by which companies pump a mixture of typically sand, water, and chemicals into a hole in the ground to fracture the tight rock formations beneath and create space for the oil and natural gas trapped there to come out and reach the surface.”

2. The Tides Turn on Wall Street

• Shift in Investor Expectations:

  • Initially, shale companies were treated as "growth companies," with emphasis on rapid production increases.
  • Over the past two years, investors have demanded profitability, better returns, and free cash flow.
    • Elliott (04:15): “For a long time, shale companies were generally funded as growth companies ... In the last two years or so, investors have changed what they have asked ... rather than seeking a fast pace of growth, they’re asking companies to moderate both growth and spending and to try to generate better returns and free cash flow.”

• Compounding Pressure: Falling Oil Prices

  • Declining prices have heightened financial strain, especially on smaller companies lacking balance sheet flexibility.
    • Elliott (05:04): “Any time that oil prices decline, as they have in recent days, it puts added strain on companies, particularly the ones that are smaller and might not have as much flexibility on their balance sheets.”

3. Reluctance to Borrow & Alternative Funding Strategies

• Reluctance to Issue Debt or Equity:

  • To prove fiscal discipline, many shale producers are steering clear of traditional borrowing and equity issuance.
    • Elliott (05:38): “Shareholders have been pressing companies quite hard to show increased discipline ... we’re seeing ... companies a lot more reluctant to tap the equity and debt markets.”

• Turning to Asset Sales and Partnerships:

  • Companies are generating capital by selling pipeline/infrastructure assets or forming drilling partnerships.
  • Such methods help avoid adding debt while still raising funds.
    • Elliott (05:38): “They’re instead turning to things like asset sales of pipeline or other infrastructure interests and other types of drilling partnerships that might provide them capital without putting debt on the balance sheet.”

4. The Plight of Smaller Frackers

• Increased Vulnerability:
  • Smaller firms are hit hardest by the financing squeeze and are forced to consider riskier funding options, such as junk bonds.
    • Elliott (06:32): “The smaller companies generally don’t have as much flexibility. And so whenever there’s kind of a financing squeeze, it’s typically the smaller companies that have the most trouble and kind of have to seek out the riskier financing.”

5. Drilco Partnerships Explained

• Definition and Purpose:
  • “Drilco” partnerships involve outside investors funding groups of wells in exchange for the bulk of early-life well returns.
  • Provides oil and gas firms with necessary funding without increasing balance-sheet debt, offering modest returns and helping retain valuable acreage.
    • Elliott (06:57):
      “One route some companies are considering is partnering with an outside investor who would put up the capital to drill a group of wells in exchange for most of the returns from the wells’ early life ... provides them a way to access funding to drill wells ... but doesn’t require them in most cases to list any debt on their balance sheets. It’s a way of kind of threading the needle ... while trying to satisfy some of the investor demands in the market right now.”

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Notable Quotes & Memorable Moments

• On changing investor expectations:
  • Rebecca Elliott (04:15):
    “Rather than seeking a fast pace of growth, [investors are] asking companies to moderate both growth and spending and to try to generate better returns and free cash flow.”
• On fracking’s funding evolution:
  • Rebecca Elliott (05:38):
    “Companies are a lot more reluctant to tap the equity and debt markets ... instead turning to things like asset sales ... and other types of drilling partnerships.”
• On the outlook for smaller producers:
  • Rebecca Elliott (06:32):
    “Smaller companies generally don’t have as much flexibility ... and kind of have to seek out the riskier financing.”

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Key Timestamps

• 03:07: How fracking transformed U.S. oil production
• 03:36: Basic explanation of fracking
• 04:15: Shift in Wall Street expectations from growth to profit and cash flow
• 05:04: The impact of dropping oil prices on shale producers
• 05:38: Asset sales and creative funding alternatives
• 06:32: Smaller shale companies facing harsher conditions and riskier financing
• 06:57: Explanation of Drilco partnerships as a financing strategy

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Summary in One Sentence

As Wall Street funding for frackers dries up due to a lack of profits and falling oil prices, U.S. shale companies—especially smaller ones—are adapting by cutting spending, selling assets, and pursuing creative (sometimes risky) partnerships to stay afloat and satisfy investors’ new demands for discipline and returns.

Transcript

[A]

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[B]

Here's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Companies involved in fracking or the extraction of oil and gas from underground rock formations were darlings of Wall Street. That is, until they couldn't score profits. In a moment, we'll tell you where the fracking companies are looking now to drill for cash. First these money and market stories you should know about half of U.S. workers say they need a side job to pay their bills. A survey from Bankrate.com says that number includes 48% of millennials. A side job, sometimes referred to as a side hustle, can provide an average of $1,122 per month. That's up from $686 last year. And about 40% of millennials who do work a job on the side say that gig brings in half of their monthly income. Bankrate says the number of people with side jobs is rising because while expenses are rising, wages at their full time jobs are staying fairly stagnant. In May, the Labor Department reported Hourly wages rose 3.1% in May, but that figure is actually much lower when adjusted for inflation. And the Wall Street Journal examines the long road to today's student loan mess, in which borrowers currently owe more than $1.5 trillion in student loans, and more than 2 million of them have defaulted on their loans in just the past six years. It all goes back to the Higher Education act of 1972, which created a permanent role for the government in guaranteeing student loans made by private banks. And it also created the government agency known as Sallie Mae, which borrowed from the treasury at low rates and used the money to buy student loans from banks, thus freeing up the banks to make even more loans to students. Schools then raised their prices, and millions of students who took out loans were forced to drop out. Even companies like Google and Apple have dropped college degree from the list of requirements for job applicants. So where does the system go from here? See the full story by Journal reporter Josh Mitchell on WSJ.com or the WSJ app. It wasn't that long ago when fracking was all the rage. All the rage, that is, for Wall street, until investors got impatient with fracking companies not turning profits. Wall Street Journal reporter Rebecca Elliott is on the line with us to talk about how fracking companies are finding new ways to drill now that the Wall street money pipeline has in some cases dried up. So, Rebecca, let's catch everybody up for a moment. Fracking companies, also known as shale companies, they've helped turn the US Into a world oil production leader. And as a technology, fracking's been around for what, about 60 years.

[C]

So fracking and horizontal drilling have really helped propel U.S. production in the last decade. And so right now, U.S. oil production is at about 12 million barrels a day, which is an all time high, and it's made the US the top oil producer in the world.

[B]

And just as a quick review, what is fracking?

[C]

So, fracking is a process by which companies pump a mixture of typically sand, water, and chemicals into a hole in the ground to fracture the tight rock formations beneath and create space for the oil and natural gas trapped there to come out and reach the surface.

[B]

All right, and how long has it been that Wall Street's been sort of riding these companies, expecting profits?

[C]

For a long time, Shale companies were generally funded as growth companies, and so they focused on growing production quickly, year over year. And really, in the last two years or so, investors have changed what they have asked of shale companies. And so rather than seeking a fast pace of growth, they're asking companies to moderate both growth and spending and to try to generate better returns and free cash flow.

[B]

And aside from Wall Street's impatience, the falling oil prices have hit these companies really hard in their pockets.

[C]

Right. Any time that oil prices decline, as they have in recent days, it puts added strain on companies, particularly the ones that are smaller and might not have as much flexibility on their balance sheets.

[B]

But as you point out in the story you wrote with Christopher Matthews, even with tight finances, shale producers, they've been sort of reluctant to borrow, to show and prove to their own investors that they're being smart with their budgets.

[C]

Right. Shareholders have been pressing companies quite hard to show increased discipline in their spending and borrowing habits. And so what we're seeing is that companies are a lot more reluctant to tap the equity and debt markets. And so they're instead turning to things like asset sales of pipeline or other infrastructure interests and other types of drilling partnerships that might provide them capital without putting debt on the balance sheet.

[B]

And smaller companies are being hit harder than the larger companies are. And what I thought was interesting is that some companies are really going a rather unorthodox route, and that is they're considering junk bonds.

[C]

The smaller companies generally don't have as much flexibility. And so whenever there's kind of a financing squeeze, it's typically the smaller companies that have the most trouble and kind of have to seek out the riskier financing.

[B]

And you also mention in the story that some frackers are considering what are known as Drilco partnerships. Can you explain what those are?

[C]

One route that some companies are considering is partnering with an outside investor who would put up the capital to drill a group of wells in exchange for most of the returns from the wells early life. And so for oil and gas companies, this provides them a way to access funding to drill wells that they otherwise might not be able to and provides them kind of a modest return, but doesn't require them in most cases to list any debt on their balance sheets. And so it's a way of kind of threading the needle to either bring production on faster, maybe hold on to acreage that they otherwise might lose while trying to satisfy some of the investor demands in the market right now.

[B]

All right, that's Wall Street Journal energy reporter Rebecca Elliott on the line with us from our Houston bureau. Rebecca, thanks so much for coming on the show.

[C]

Thanks so much for having me.

[B]

And that's your money briefing. I'm J.R. whelan in New York for the Wall Street Journal.

[A]

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