Shale industry gets Wall Street help

(MENAFN- Arab News) NEW YORK: The shale industry is getting Wall Street's help in re-arming for its oil-market war against OPEC offering one more reason to be bearish on crude prices.
Pioneer Natural Resources Co. announced it was tapping investors for $1.4 billion in fresh equity to help finance an increase this year in spending and production in Texas where wells are still profitable.
The share sale shows capital markets are still willing to back the shale industry as crude trades at the lowest in 11 years.
'US shale oil producers had been able to resist more than OPEC expected and that is going to continue in 2016' said Olivier Jakob of Zug Switzerland-based oil consultants Petromatrix.
The move if followed by other top shale producers could lead to a shallower drop in US oil production than currently expected putting further downward pressure on crude prices.
On Tuesday Brent the global oil benchmark fell below $35 a barrel for the first time since 2004.
US production peaked at almost 9.7 million barrels a day in April.
Since then it has dropped to 9.3 million barrels as companies tightened their belts to cope with low prices.
The US Energy Information Administration a federal body that tracks supply trends expects production to drop to 8.8 million on average in 2016.
The Organization of Petroleum Exporting Countries abandoned production targets at its last meeting in December and is counting on low prices forcing US shale drillers to cut investments eventually reducing production and rebalancing the market. If shale output drops less than expected as in 2015 that process is likely to take longer.
Texas-based Pioneer which hired Bank of America Citigroup Credit Suisse Group and JPMorgan Chase for its equity raising said in a statement it was boosting spending while many rivals retrench because its oil wells in the Permian Basin in West Texas were outperforming expectations. The biggest gushers are generating 30 percent returns it said.
In a sign of investors' appetite to support shale companies Pioneer increased the size of its offering to 12 million shares from 10.5 million shares within hours of its first announcement. The company said it expected to sell the new shares at $117 apiece a 6.5 percent discount to Tuesday's close raising gross proceeds of $1.4 billion.
'This equity offering is yet another example of how open the capital markets remain for the Permian E&Ps' Cannacord Genuity said in a note to clients referring to an area of Texas where Pioneer operates. 'As long as access to capital is basically unfettered for the large E&Ps oil prices should continue to face downward pressure.'
Still US shale producers face an uphill battle in 2016. At current prices investment bank Tudor Pickering Holt & Co. in Houston estimates that the shale industry will spend $9 billion more than it will earn this year although the gap could be 'partially covered' with asset sales and additional cuts to investment programs.
Last year US shale producers largely relied on debt markets to bridge the gap with credit investors throwing them a lifeline. But over the last few months debt markets have tightened significantly. The average yield of US energy junk bonds jumped above 16 percent for the first time since the 2008-09 global financial crisis in December according to data from Bank of America.
Fitch Ratings expects that the default rate in the US energy high-yield debt market will rise to 11 percent this year up from 7.2 percent in December as the 'beleaguered energy sector' battles low oil and gas prices.
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Keywords: SHALE-OPEC-WAR-1