Oil is below $35. Here's what that means for US producers

Published Mon, Mar 9 202012:49 PM EDT

(This story is for CNBC PRO subscribers only.) As oil prices plummet, the health of the U.S. shale industry hangs in the balance. Highly leveraged energy companies require a certain price per barrel in order to breakeven, and as oil prices stay suppressed, a wave of consolidation or bankruptcies could be on the horizon. On Monday U.S. West Texas Intermediate crude plunged nearly 30% at the low to trade at $27.34, before recovering somewhat to hover around $34.21 per barrel. The steep sell-off comes as relations between Saudi Arabia and Russia sour, prompting fears of an imminent price war. WTI is now trading trading nearly 50% below its 52-week high level of $66.60 from April, meaning producers are scrambling to adjust to a new price reality. And in a world where energy companies need to pay down their debt, stopping the pumps is a last resort. "I don't think that $35 WTI is sustainable for the shale oil producers," Lipow Oil Associates President Andy Lipow said Monday. When it comes to major integrated players — such as Chevron and Exxon — he said they will either have to cut their capital expenditures or their dividend since both are not sustainable with WTI at $35. For smaller companies, he said that while they might be protected through 2020 thanks to hedging when prices were higher, longer-term some "will not survive the downturn." Rystad Energy partner Artem Abramov echoed this point, saying "$30 WTI is too low for the majority of the U.S. shale producers," and that as 2020 continues some producers might struggle to service their debt, meaning "they will have to cut new activity to zero." Smaller companies, greater risk "Dramatic production decline will then happen throughout 2021," he added. Both Abramov and Lipow said that it will take time before the full repercussion of lower oil prices is felt. Of course, each company's business operations is unique and no two balance sheets are alike. But smaller companies do tend to be more highly leveraged than the larger integrated names, meaning they could be more at risk. The U.S. oil and gas industry has about $86 billion of rated debt due in the next four years, according to Moody's. As prices drop, expect industry consolidation ahead, said CIBC Private Wealth Management Rebecca Babin. "The kneejerk reaction will be to declare the end of U.S. energy, but realistically it is more likely to mean a smaller universe of companies that will continue to compete in this environment," she said. Of course, another factor is how long oil prices trade at depressed levels. "If this is a short-lived sell-off, some but not all will have issues," said Greenberg Capital founder David Greenberg. Lipow noted to watch factors like the rig count, since that will be an indication of whether there have been investment declines. He said that the boom in the shale patch, which propelled the U.S. to a net energy exporter, could "come to a screeching halt, and in fact start to decline."

A drilling crew member on an oil rig in the Permian Basin near Wink, Texas.

Nick Oxford | Reuters

(This story is for CNBC PRO subscribers only.)

As oil prices plummet, the health of the U.S. shale industry hangs in the balance.

Highly leveraged energy companies require a certain price per barrel in order to breakeven, and as oil prices stay suppressed, a wave of consolidation or bankruptcies could be on the horizon.

On Monday U.S. West Texas Intermediate crude plunged nearly 30% at the low to trade at $27.34, before recovering somewhat to hover around $34.21 per barrel. The steep sell-off comes as relations between Saudi Arabia and Russia sour, prompting fears of an imminent price war.