While it is undeniable that the COVID-19 crisis has significantly impacted the oil and gas industry, it is equally undeniable that the industry was occupying unsteady ground for several years before the pandemic. Global oil demand was approaching -30% in the weeks just preceding the first salvos in the war against the novel coronavirus; factoring in the government restrictions resulting from COVID-19 represented a correction to which the oil and gas industry were unable to respond quickly enough with matching production cuts.
Following the decrease in commercial and industrial activity due to the pandemic, electricity demand has also dropped off; lending and cash flows across the entire sector have been and will continue to be affected, potentially altering the landscape in ways that some experts say might be permanent.
Chaos in Balance Sheets, Lending
According to Jason Hall, a financial expert and writer for the business publication The Motley Fool, “The cracks in many oil company balance sheets are starting to widen. Whiting Petroleum (NYSE: WLL) filed for bankruptcy in early April. Chesapeake Energy (NYSE: CHK) has hired restructuring advisors as one of its largest investors. The implications aren’t just for oil producers, or onshore operations. Offshore driller Diamond Offshore (NYSE: DO) said it will skip its next interest payment, an action that will cause the rest of its debt to default.”
Banks are not rushing to bail out the industry either, regardless of the potential impact on the economy overall. “There is word that some of the biggest banks have already started the process of setting up separate operating companies to take over oil production assets from borrowers that default,” Hall says, “instead of trying to sell the assets for pennies on the dollar.” Hall believes that asset values are now so depressed in the current environment that banks can’t afford to take the losses they would incur in what will is likely to be an extreme buyer’s market for troubled oil assets.
Hall said that all of this could permanently alter lending in the energy industry. With so many oil producers that can’t survive even a few months in the current environment, he expects that lenders will require companies to retain far more cash in the future, restricting their cash flow even further.
The Butterfly Effect: Clean Energy Taking a Hit
The ‘Fool’s John Bromels, another industry expert, points out that areas of the greener and cleaner energy sector are also being hard-hit as a result of the upset in oil and gas. “When you’re thinking about the impacts of the oil price crash,” Bromels says, “you’re probably not thinking about hydrogen fuel cells, but there are actually some indications that today’s low oil prices could put a big dent in fuel cells tomorrow, affecting stocks like Plug Power (NASDAQ: PLUG) and Bloom Energy (NYSE: BE).
Hydrogen is, of course, a very clean, energy-efficient fuel, but that hydrogen has to come from somewhere. In the U.S., it typically comes via the use of natural gas. “Fuel cell companies like to tout that it can come from cleaner sources like biomass,” Bromels said, “but those sources make fuel cells more expensive than relying on hydrogen from cheap, abundant natural gas drilled right out of shale basins.” Since the oil price crash has set the economics of shale drilling on its ear in the U.S., many producers have opted to cease operations. “Most shale producers extract both oil and gas, so the big domestic natural gas oversupply that’s kept prices so cheap may be coming to an end,” Bromels said.
The Future for Electricity
Senior energy and materials specialist Matt DiLallo has a grim take on how the disrupted electricity infrastructure will impact fossil fuel demand in the wake of the oil price crash. “For more than a decade, we’ve seen a slow transition from the century-old fossil fuel energy infrastructure to new forms of energy like wind and solar electricity and electric vehicles,” he says. “I think this oil crash will accelerate that transition.” As far as electricity generation goes, “John (Bromels) makes a compelling argument that natural gas prices will rise because of a reduction in shale drilling,” DiLallo says. “If that’s true, it’ll make natural gas power plants even less competitive with wind, solar, and energy storage. At the same time as natural gas prices are going up, the short-term demand for wind and solar plants is going down, because utilities need less electricity, and developers are running into their own financial problems.”