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“The problem is that the US shale sector in aggregate is still not free cash-flow positive even after five years of soaring production, and if the shale model was not able to show positive free cash-flow even when prices were averaging around $100/bbl from 2011 until mid-2014, then investors and lenders will clearly be very nervous about increasing their exposure to the sector in the current price environment. On the contrary, we think they are more likely to be looking to reduce their exposure, which explains why yields on the debt of independent US energy companies (much of it sub-investment grade or “junk”) have been rising sharply, as oil prices have fallen in recent months, and why the share prices of independent US energy companies have been tanking. In short, investor patience in the US shale-oil story is now being tested as never before, and the obvious risk is that more bankruptcies could occur in the coming months if prices persist at current levels…
“In short, given the pressure that low oil prices are now putting on capex plans for 2015, and hence on new drilling, we think shale-oil production growth will begin to stall in late Q2 2015 or early Q3 2015. And when this happens, we think market expectations of continuing rapid growth in shale-oil supply will have to be revised downwards, thus prompting an upward price correction, as the market realizes the outlook for future shale-oil supply, and hence for the global oil supply more generally, is in fact more constrained (and perhaps much more constrained) than it currently thinks.”
— Kepler Cheuvreux, European-based market analysts