OPEC's message to US shale: Drop dead

OPEC just fired a shot at the U.S. shale industry.
Despite tumbling prices -- the lowest since 2010 -- the
cartel surprised the energy industry by deciding to keep
pumping oil at current levels. One motivation is to squeeze
higher-cost producers in North America, including the
booming U.S. shale industry that has reshaped the global
energy landscape.
It's a move Tony Soprano would be proud of. OPEC is
betting lower oil prices will force U.S. producers to
throw up the white flag and cut back on production
because they won't be able to turn a profit.
"The gauntlet has been thrown down for Western
Hemisphere producers like Brazil, Canada and the
United States," Bespoke Investment Group wrote in a
note to clients on Friday.
Dot-com bust all over again? The fear is that OPEC's
hard line could cause a pull back in the U.S. shale
industry, sparking job losses and causing panic in the
financial markets.
That's what Russian oil tycoon Leonid Fedun is
predicting, although Russia isn't part of OPEC.
"The shale boom is on par with the dot-com boom. The
strong players will remain, the weak ones will vanish," he
told Bloomberg News on Thursday.
The OPEC move has clearly spooked investors, who sent
energy stocks like Halliburton, Helmerich & Payne and
Schlumberger plummeting on Friday. (U.S. markets
were closed for Thanksgiving Day on Thursday).
"I think there will be increased scrutiny of the balance
sheets of the exploration and production companies. You'll
see some of the weaker players fall out," said Tamar
Essner, energy analyst at Nasdaq Advisory Services.
Credit stress ahead: That scrutiny forced SeaDrill
Limited to suspend its dividend earlier this week, causing
the offshore drilling contractor's stock to plummet 23%.
Essner "absolutely" expects more drillers and oil servicing
companies to cut or even suspend dividends. Bespoke's
baseline scenario calls for dividend suspensions and bond
defaults among more "marginal" named producers.
Many troubled shale companies will be able to avoid
bankruptcy by selling acreage to boost cash flows though,
said Per Magnus Nysveen, head of analysis at Rystad
Energy.
No crash just yet: While financial stress could be looming
for shale oil producers, experts aren't forecasting a
complete meltdown.
"I don't think this will spell the death knell of the U.S.
shale industry. Time and again this industry has proved
very resilient," Essner said.
Nysveen said the breakeven crude oil price for U.S.
shale producers is around $50 or $55. Despite the recent
plunge, oil is still well above that at the $70 range.
Those crucial breakeven points have been trending lower
and lower in recent years thanks to technological advances
that have made oil producers dramatically more efficient.
"U.S. production is much more competitive than 30 years
ago," Nysveen said.