From The Economist: "So far this year oil-production firms have raised $15 billion of equity and $20 billion of bonds, helped by frothy markets, a near-zero Fe

From The Economist: "So far this year oil-production firms have raised $15 billion of equity and $20 billion of bonds, helped by frothy markets, a near-zero Fed Funds rate and a partial recovery in the oil price. Even Goodrich, the troubled firm in Houston, managed to issue in February $100m of “second-lien” debt, which is secured against assets, at an 8% interest rate... First, consider the juicing-up of performance. During the quarter to March the industry reported aggregate cashflow from operations of $15 billion—this is the money the business throws off before capital expenditure and financing activity. But this reflects the benefit of derivative hedges taken out in 2014 when oil prices were much higher, and which in most cases will largely run out over the course of the next year or so. Exclude derivatives, and cashflow was 31% lower. Almost half of firms, accounting for 1% of global oil production, relied on transitory gains from derivatives for over half of their cashflow... Were the industry to have balanced its books (excluding the benefit of hedges), capital investment would have needed to be 70% lower. Capital investment feeds through to production volumes with a lag of 3-9 months. Today’s healthy production figures are no guarantee of future bounty. The second concern is a deep well of debt. Listed E&P firms owe $235 billion and during the first quarter debt rose, reflecting continued heavy spending. Assume a firm is in trouble if its net debt is more than eight times its annual cashflow from operations (based on the annualised first-quarter figures and excluding the benefit from derivatives). On the basis of this snapshot, 29 of the 62 firms are distressed, owing a total of $84 billion. Listed shale firms with distressed balance-sheets account for 1.1m barrels a day of oil production, or 1.2% of global oil production... In Texas and North Dakota oil men secretly dream that the global supply of crude will shrink without shale declining. The biggest oil firms, which have vast reserves of cash, are continuing to invest heavily in shale. In May ConocoPhillips, which says it has some of the lowest-cost shale properties in America, committed to invest $3 billion a year and forecast rising production up to 2017. By this account America’s smaller E&P firms are being astute: they are using their derivatives hedges and their mastery at raising capital on Wall Street to bridge a difficult patch. When oil prices pick up later this year they will start investing even more heavily in growth, but with leaner cost bases. In a decade’s time the 2015 oil-price dip will seem as transitory as that in 2009 during the financial crisis. But there is another, less rosy scenario for America’s shale barons. Oil prices may remain flat. Towards the end of this year their hedges run out; shale-oil production dips markedly as the lagged effect of capital-investment cuts kicks in. (Output has already dipped in the Bakken basin in North Dakota.) With growth evaporating and cashflow faltering it becomes harder to sell shares—the pace of capital-raising has indeed slowed in recent weeks. The junk-bond market becomes jittery and E&P firms start to worry about refinancing the $66 billion of debt and interest that is due in 2016-18. As firms’ oil-reserves estimates are marked down to reflect lower prices, banks cut their loans, which they typically tie to reserves figures."[0] So if this article is to be believed, these oil companies will probably survive short to mid-term price decreases, and won't cause huge bank losses at least for a while. However, this only tells the tale of one commodity; with Chinese demand for commodities decreasing and the U.S. and European consumers doing mediocre financially-speaking, we may end up with a significant downturn. Not to digress, but I personally think the next crisis will be triggered by subprime student loan debt. [0] http://www.economist.com/news/business/21656671-americas-shale-energy-industry-has-future-many-shale-firms-do-not-fractured-finances http://www.economist.com/news/business/21656671-americas-sha...