ANALYSIS: How Fracking hype disguises the sector’s dangerous financial losses to date

barnumShale gas….the greatest con in history?

Poor cash-flow and forced asset sales by frackers belie the bollocks about shale being a panacea

Those who are still so gung-ho for Fracking should read some of the observations and damning commercial statistics below. They show beyond any reasonable doubt that the British people are being sold an expensive White Elephant that could yet endanger our water supply sustainability.

Fracking industry leader Cuadrilla recently released its accounts for the 2012 financial year. They show a revenue of £392,000, and loss of £18.7m.

The Muppets of Frackle Rock continue to hype natural gas and oil production from shale as the great energy solution….but serious, well-founded data are hard to find.

Energy company claims for the long term viability of shale production simply aren’t borne out by the facts, and must be cause for less demonstrating and more critical questioning……but the Ayes have it at the moment thanks to snow-job spin. However, when you look at those ludicrously poor results of Cuadrilla, you’re bound to start asking commercial questions that have, so far, been sorely lacking in the shale debate.  When you interrogate the numbers, whether they be the cost in UK water usage, significant deterioration of free cash flow at virtually every shale company (or the cost of externalities able to knock 50-60% off earnings at companies the size of Royal Dutch Shell and Exxon Mobil) one has to sit back and consider that, hey – who knows guys? – maybe shale fracking is full of sh*t.

I posted about this to some extent last week, but there are doubts on many dimensions. According to Bloomberg just two days ago, ‘The spending slowdown by international companies including BHP Billiton Ltd. (BHP) and Royal Dutch Shell Plc (RDSA) comes amid a series of write-downs of oil and gas shale assets, caused by plunging prices and disappointing wells.’ “Writedowns” and “disappointing wells” are not the stuff of public offering scrambles. Bloomberg added that ‘fields bought during the 2009-2012 flurry remain below their purchase price.’ Uh-huh.

Chesapeake recently closed a couple of deals recently for about 1/4 of estimated value. The deal-making slump, which may last for years, threatens to slow oil and gas production growth as companies that built up debt during the rush for shale acreage can’t depend on asset sales to fund drilling programs. (Note the point of figures from North Dakota I surveyed last time: they confirm this trend in full.)

Here’s another simple commercial observation: when starting up something supposed to be dinky-doodle-dandy, you’re should be seeing get tidal waves of cashflow. But, er, this doesn’t seem to be happening. The Energy Policy Forum recently noted as follows:

“Free cash flow of Continental Resources, a big player in the Bakken, has dropped from a loss of ($430M) to a loss of ($2.4B) since 2010. And Continental is not the only one. Devon Energy’s free cash flow has dropped from ($1.2B) to a significant ($3.5B) over the same time frame. Range Resources, who are drilling primarily in the Marcellus, booked a negative free cash flow of ($556M) in 2010 and this has deteriorated to ($1.0B). Kodiak Oil and Gas, another Bakken player, had negative free cash flow in 2010 of ($170M). It has now deteriorated to ($1.0B). Chesapeake is interesting because its free cash flow for 2012 ($3.3B) is now roughly equivalent to its level in 2010, ($3.4B). But over the last two years Chesapeake has liquidated approximately $13 billion in assets with no commensurate gain to free cash flow. Management still needs to move outside the company to generate cash to continue operations. And yet, shareholders have had their underlying assets disappear to the tune of $13B to pay down debt.”

What we are uncovering here is a scam of gigantic proportions: miners with asset problems and floored cash outflow are hunting everywhere for new ways, ever more desperate ways, to prop up serious business problems reflective of – as I’ve said since Day One with shale fracking – the obvious diminishing returns involved…..and the hit and miss nature of drilling. This entire slagheap of hype, however, can’t hide the fact that Shell wrote down the value of its North American holdings by more than $2 billion last quarter. From 2009 to 2011, Shell’s cash flow rose and then plateaued between 2011 to 2012. But from 2012 to the latest quarter reported, there has been a steady decline.

Shell’s CEO Peter Voser stated earlier this month: “The major [shale] acreage deals are behind us now”.

Why would he say that if we were on the verge of a gas bonanza?

The company informed investors that its North American oil and gas exploration will most likely remain unprofitable until sometime in 2014. Meanwhile they intend to divest shale assets.

Further, their losses were specifically in shale oil according to the company report.

ExxonMobil also took a hit to the bottom line with earnings falling more than 50% from the same quarter 2012. Chevron, too, is struggling. Yet in spite of such glaring financial anomalies, industry propaganda robots like Energy in Depth (EID) continue to turn out hyper-bollocks. This month, EID drivelled thus:

“That’s right, folks…As we continue to see across the United States, the shift in production techniques comes with countless, game-changing benefits for the nation. And, not for nothing, the Saudi Prince is absolutely terrified of what U.S. shale production could do to his country’s control of the global oil market.”

“Roll up, roll up, roll up….see the Amazing Bearded lady with two heads and thirteen legs coming out of her ears…”. It really is pure Barnum & Bailey stuff. But behind the bollocks, the facts sit there like the dog’s proverbials: the major operators, including some of the largest and most capable oil and gas companies on the planet, have so far failed with spectacular consistency to translate shale gas fracking into a meaningful long term return for investors ever-more-keen these days to find something – anything – solid to get behind. And this – according to Bloomberg again – is what that turns into:

Shale Grab in U.S. Stalls as Falling Values Repel Buyers

In conclusion, let me tell you where – as a businessman more than a blogger on this one – I’m heading to about fracking. I think unless somebody with an ounce of common sense in the UK Coalition steps in now to take a risk and tell it like it is, the people who wind up giving this utterly baseless fraud a role in Britain’s medium term energy policy will be rewarded with a level of public opprobrium to make Connecting for Health, the PFI, the Iraq War, and the Poll Tax fiascos rolled into one seem a teacup-storm by comparison.

I’d love for Ed Miliband to go out on a limb for us, but….Ed, limb, go out on? Hahahahahaaha.

Now of course, those of us in the ‘Decency Resistance’ would dearly love for the Condemned to get it precisely in the jugular re this one. But I don’t want that to involve the degrading, polluting or even endangering of our water supply as the price of achieving that.

This is the last time I’m going to make this obvious point: if we want to stop the maniacs yet again landing is in the mire here, we need to do far more than hug a piece of shale, and get ourselves arrested so the Daily Wail can demonise us. If we want to engage middle Britain, then it is the water supply and commercial arguments that will win the day.

If the Tories think they aren’t going to carry their supporters with them here, they might back down….or even (dare I suggest such an odd thing) change course towards 99% pollution-free coal.

Related to this issue from Yesterday: How the LABoraTORY worked in concert to f**k up our energy future