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Shale’s junk debt could get shaky if Fed raises rates

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Extracts from a Houston Chronicle article by Collin Eaton published 27 June 2014

(Good article. Not Shell specific, but a generic problem to which Shell is heavily exposed)

Two years after natural gas prices collapsed, Chesapeake Energy’s $12 billion in corporate debt last month nearly made it out of junk territory.

The natural gas producer has sold off thousands of acres, curbed billions in spending, cut a tenth of its workforce and banished its chief executive in the effort to trim a debt-laden balance sheet.

A credit upgrade in May signaled progress, but hardly an end to an episode that has highlighted the dangers of the U.S. shale industry’s addiction to risky debt.

Corporate bond investors, eager to buy high-yield bonds from U.S. independent oil and gas producers, have tripled the sector’s junk-rated debt (formally called speculative-grade) to $788 billion since the shale energy surge began seven years ago. But next year, the Federal Reserve may tap the brakes.

St. Louis Fed President James Bullard sent a jolt through equity markets Thursday when he speculated the nation’s economy could be ready for higher interest rates by the first quarter of next year.

But the gatekeeper of the nation’s money supply already has signaled it is planning to end its multibillion-dollar bond-buying program by the end of the year, and then begin to raise short-term interest rates toward historically typical levels from the near-zero rates that helped jump-start the recovery.

Higher interest rates might make risky new bond issues by shale producers less attractive, and a flight of investor capital could leave the producers short on a commodity even more precious than oil: Cash.

In addition to international conflicts, activist shareholders’ push for major oil companies, including Exxon Mobil, Royal Dutch Shell and Total, to exercise a new capital restraint probably will push oil prices up as production falls, Barclays analyst James West wrote in a report earlier this month. The industry saw a similar climb in crude prices in 2004 and 2005 after the majors pulled back spending.

FULL ARTICLE

RELATED: The US Shale Oil Miracle Disappears

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