No bailout for fracking
by Lukas Ross, senior policy analyst at Friends of the Earth
This analysis was updated on 3/25/20 to take the CARES Act into account.
The financial instability of the fracking industry existed long before the coronavirus. At a time of unprecedented emergency, polluters are now poised to benefit from potential bailout funding in coming stimulus bills.
27 major fracking companies began the year “in the red” with negative free cashflow (FCF) and have over $26 billion in Total Current Liabilities due in 2020. This includes interest on debt and other pending obligations.
The two competing stimulus bills in both the House and the Senate need to exclude fracking and the rest of the fossil fuel industry from the “critical industries” eligible for aid.
The coronavirus is an unprecedented public health emergency. Urgent human needs are going unmet and entire sectors of the economy are collapsing in real time. Resources to help frontline workers and the most vulnerable must be mobilized immediately.
In the US, which now boasts the third highest number of COVID-19 cases in the world, all eyes are on Congress, where a stimulus potentially as large as $1.6 trillion is being frantically negotiated.
The republican position is simple: direct aid for individuals and frontline public health workers must be conditioned on a massive corporate slush fund potentially as large as $500 billion. Much like the Wall Street bailouts of 2008, this money would be doled out to corporations in need as loans with few or no strings attached.
The precise conditions for these loans — whether it would protect jobs or limit stock buybacks — is now the subject of fierce negotiations between the House and the Senate. As these talks continue and a stimulus bill makes its way to Trump, one industry is watching the proceedings very closely — it’s Big Oil, especially those companies heavily invested in fracking.
A bad time to be shale
Even before the coronavirus, the underlying economics of hydraulic fracturing were looking shaky. Although the controversial drilling technique had vaulted the US to the number one oil producer in the world, the profits of the companies most engaged in the practice were elusive. Wall Street, which had lent liberally to finance the capital intensive practice, was starting to lose patience. Oil prices were low, and late last year banks began cutting the so-called price stack, the rate at which oil and gas reserves are valued for lending purposes.
By the beginning of 2020, the fracking industry was sitting on a colossal $106 billion mountain of debt. According to the Institute for Energy Economics and Financial Analysis (IEEFA), a cross-section of the 34 most prominent frackers ended 2019 with a negative cash flow of $2.1 billion. The authoritative Haynes and Boone oil and gas bankruptcy tracker reported 41 filings in 2019 — more than double the total from the previous year. This was before anyone with the coronavirus so much as coughed.
Two overlapping factors are poised to make 2020 much worse: the price war between Russia and Saudi Arabia and the total collapse in demand as coronavirus grinds the global economy to a halt. A gallon of gasoline could soon drop below a dollar. Just last week the ratings agencies snapped into action and down-graded the debt of major driller Occidental to junk with more downgrades expected to follow. Prominent fracking firms like Chesapeaker, Pioneer and Antero are all scrambling to hire firms specializing in debt restructuring.
As traditional sources of cash and lending become precarious, McConnell’s corporate slush fund is probably looking very good indeed to frackers aiming to avoid bankruptcy.
Late last year oil and gas producers were surveyed on how they intended to raise capital in 2020. The most popular response (28 percent) was cashflow from existing operations. The second highest (20 percent) was debt from banks. But with the price collapse cutting into cashflow and debt downgrades cutting into credit availability, cash-strapped frackers are going to need to find money from somewhere to service their massive liabilities. Cutting costs and selling assets are two options, but an emerging third choice is federally subsidized loans and loan guarantees.
That is why the conversation happening in Congress is so urgent and so dangerous. If there is a colossal corporate bailout with limited or no conditions, the fracking industry could be a major beneficiary. The Senate bill that stalled over the weekend included $425 billion in lending for “essential industries,” a term which isn’t defined but which presumably includes oil and gas if Donald Trump or Steve Mnuchin is deciding. As traditional sources of cash and lending become precarious, McConnell’s corporate slush fund is probably looking very good indeed to frackers aiming to avoid bankruptcy.
In order to gauge the potential value of a bailout to the fracking industry, Friends of the Earth reviewed the most recent annual SEC filings of the most prominent drillers. We began with the 34 companies in the IEEFA shale dataset and then eliminated the eight of them with positive total free cash flows in 2017, 2018, 2019. We were left with 27 companies with total negative free cash flow during those years. These are the companies most in “the red” and presumably least able to withstand economic shocks to either commodity prices or credit markets.
We then considered these comparatively vulnerable companies next to their total current liabilities for 2020. Total current liabilities essentially refer to all the bills coming due within the next calendar year. For oil companies, this includes things like interest on debt, derivative contracts hedging commodity prices, and agreements renting pipeline capacity.
The companies least able to cover the costs of their current business are heading into coronavirus with a grand total of $26.287 billion in debt and other liabilities due over the course of 2020. This is a veritable timebomb.
Improvements needed in both the House and Senate
The situation seems to change hourly, but there are currently two competing stimulus bills emerging separately from the House and the Senate. The bill from Speaker Pelosi includes $250 billion in emergency funding and would set strict conditions on companies receiving the aid. There would be a ban on stock buybacks, protections for existing jobs, and any aid to the airline industry would be contingent upon emission reductions. The bill from Speaker McConnell has been called a corporate slush fund. It would make available $415 billion with only moderate controls on executive compensation and controls on stock buybacks that the Treasury Department would be empowered to waive.
Although Speaker Pelosi’s bill is far superior to Leader McConnell’s, neither currently includes the tough language required to protect communities, the climate, and taxpayers from a runaway bailout of the fossil fuel industry. These sectors must either be banned from seeking subsidized loans, or else support must be conditioned on the phase-down of fossil fuel production and the guaranteeing of pension obligations for workers.
Bailout Dangers Beyond the Stimulus
Stimulus or no, polluters are not going to stop exploiting the crisis of the coronavirus for their own profits. Over $15 billion in annual subsidies are apparently not enough. Some of the other giveaways the Big Oil is angling to include as part of coronavirus aid are:
- Buying oil to boost prices. Up to $20 billion in taxpayer funds to shore up the oil industry by making direct purchases for the Strategic Petroleum Reserve, the federal government’s emergency supply of oil. The latest version of the GOP Senate stimulus plan includes $3 billion to try and raise oil prices using this mechanism.
- Reductions in royalties for extraction on public lands and waters. Given falling prices, reducing royalties would only further the glut on the market. But the industry is eager to exploit the crisis to lock in lower royalties for the future. This includes fourteen industry aligned members of Congress who asked Interior Secretary David Bernahrdt to wave royalties for offshore drilling in the Gulf.
- Critical safety and environmental rollbacks. The lobbying arm of Big Oil, the American Petroleum Institute (API), has requested that Trump and the EPA rollback critical compliance, safety and environmental regulations at a time when frontline communities are already at higher risk from the coronavirus.