The evidence that U.S. shale oil producers are facing increased hardship is growing every day, and even the government agency responsible for keeping tabs on the energy industry can't hide the pain that's coming.

The U.S. Energy Information Administration (EIA) has put out data showing that debt is strangling U.S. oil producers and low oil prices will only worsen the problem. With production expected to fall 400,000 barrels per day or more next year and revenue from existing wells failing to cover debt costs, it could be a long year for the energy industry. 

Debt is becoming a big problem
There's a lot of ways to show the financial trouble U.S. oil producers are in, but this one might be the best. Below is a chart showing the percentage of operating cash flow U.S. onshore oil producers are using to service debt. It's over 80%, and rising to 90% very quickly.  

Image: U.S. Energy Information Administration

If oil prices remain low, debt costs alone could strangle companies with billion of dollars in debt and a large portion of them bankrupt. To make matters worse, the cost of debt trends could make this problem even worse.

What happens when debt becomes a big problem?
Adding salt to the wound for leveraged oil producers, debt providers have recently been demanding higher returns to fund energy explorers. As you can see from the chart below, yields on corporate bonds in the energy sector have jumped since the middle of last year, and are climbing well above what other industries are paying.  

Image: U.S. Energy Information Administration, based on Bloomberg, L.P. data.

These higher yields combined with the high debt service ratios will make it harder for energy companies to refinance debt when it comes due. It's a vicious cycle that companies can end up in, and unless oil prices turn around quickly it looks like some high profile names could fall to this downward debt cycle.

We're already starting to see debt eat into fundamentals. Look at the debt to equity ratio trend for Linn Energy (NASDAQ: LINE), Energy XXI Ltd. (NASDAQ: EXXI), and Sandridge Energy, all three of which are struggling just to stay alive.

LINE Financial Debt to Equity (Quarterly) Chart

LINE Financial Debt to Equity (Quarterly) data by YCharts

Unless some sort of rebound in the price of crude oil happens soon, lower coverage ratios and higher costs for debt for these companies will leave them restructuring their operations or liquidating altogether.

The shale boom is dying
The U.S. shale boom once seemed like a no brainer for investors, but with the EIA predicting a decline of 400,000 barrels of oil in daily production in the U.S. next year, including half a million barrels per day in the lower 48 states, it's not looking like a bet that will pay off.  

Falling production, low oil prices, and increasing costs of debt are a death spiral for U.S. shale, and investors need to beware of buying into any recovery story. Without relief from debt even some of the strongest shale drillers are in for a rough few years given current market conditions.