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Junk Debt Consuming Virtually All of Oil Drillers’ Revenue

Sept. 21, 2015 (EIRNS)—The only U.S. industry which has been characterized by capital expenditure over the past decade—the energy sector—has now collapsed its capital investments.

An oil field report by the consulting firm Wood Mackenzie, released Sept. 21, projects that $1.5 trillion projected capital investments in the American energy sector have been cancelled or will not take place. The reason given by Wood Mackenzie is that "While operators are seeking an average cost reduction of 20-30% on projects [to be able to start them], supply chain savings through squeezing the service sector will only achieve around 10-15% on average.... $1.5 trillion of uncommitted spend on new conventional projects and North American unconventional oil is uneconomic at $50 a barrel, and won’t be done."

The U.S. rig count is at a new low, 842 (it was just under 2,000 one year ago).

But the worse threatened collapse involves the sector’s "high-yield debt," consisting of a combination of junk bonds and leveraged loans. The Energy Information Administration reported on Sept. 18 that currently, 85% of U.S. oil drilling companies’ revenue cash flow—that of the oil majors, and of the smaller shall companies—is going to debt payments. Up until mid-2014 this proportion had been 45-55% for most of the last decade, already quite high. Eighty-five percent clearly can’t be sustained even far into 2016.

This high-yield debt bubble, in total, is about $600 billion; it is being rolled over now at rapidly increasing interest rates (11-12%); and it is facing total collapse.

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