Finance Costs Are Killing The Shale Industry

If the rapid decline rate or the massive debt doesn’t destroy the U.S. Shale Industry, the finance costs most certainly will. The amount of interest expense the shale companies have paid to finance business and increase production is stunning, to say the least. But the real problem for the shale industry isn’t the interest expense that they have already paid, but the staggering amount owed in the future.

Actually, I was quite shocked by some of the figures I was coming across during my research. You see, many articles on the Shale Industry have focused on the tremendous amount of debt saddling the companies balance sheets.  However, one surprising statistic that is not mentioned is the “Total Interest Expense” due on all this debt to maturity (or in the future).

While I have posted some graphs showing much much the shale companies were paying in interest expense each quarter or annually, I never considered how much their “Total Finance Cost” would be over the life of their loans (debts).For example, one company that I keep track of is Oasis Petroleum (OAS). Oasis has focused most of its drilling and production in the Bakken Field in North Dakota.

I believe Oasis is in real trouble because their stock price is very close to a critical $5.00 support level:

(Click on image to enlarge)

You will notice that Oasis was trading more than ten times its present value at $55 a share in 2014. Currently, Oasis is trading at $5.20 a share, and a significant close below $5.00 on the monthly chart spells big trouble for the company. Last year, Oasis paid $159 million in interest expense just to finance its debt. Which is terrible news, because the company’s free cash flow was a negative $155 million. Thus, if Oasis did not have to pay this high-interest expense, it would have been free cash flow positive.

But, as I stated, you should see how much Oasis owes in total interest on its remaining debt:

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