Oil price, overleveraging and insolvencies in the hydrofracking sector – game changers in

Recent years have seen a significant growth in unconventional methods for extracting oil and gas (hydraulic fracturing or hydrofracking) in the US. Such developments also coincided with substantially higher and stable crude oil prices over a prolonged period of time. Combined, these factors have contributed to the sector companies’ ability to borrow substantial amounts to finance capital expenditures. Higher oil prices in this case serve as businesses’ profitability assurance and subsequent long-term debt financing capability.  More recently, driven by intensifying competition and with the collapse in oil prices, big conglomerates with healthier financial statements have lost controlling market share in oil production and subsequently the ability to set prices anymore. A new stability equilibrium is about to be established under current conditions. In this paper we develop a theoretical model that accounts for the issue of overleveraging of hydrofracking companies. With the use of NMPC modeling we provide the dynamic path with the stability points: either a tight oligopoly or an extensive competition. In this analysis, we develop a measure of overleveraging, which is defined as a difference of actual and sustainable debt. Obtained results indicate smaller hydrofracking companies’ significant borrowing capacity in their early growth stages when oil prices were relatively high. Now as oil prices have come down having burned their cash reserves through unprofitable explorations and investments, smaller sector players are unable to service their debt in the long run.  The new realities have changed the game in the oil production sector and will create a different set of scenarios for the winners and losers in that sector.