American shale producers have performed in an exemplary fashion over the past year. It was not something the industry wanted to do. It’s something it was forced to do by the pandemic and by its shareholders, who, after years of waiting for bargains, have put their foot down and demanded higher returns. But maybe it is time for a change.
The American shale must now be used to price shocks. Even so, the destruction of demand for crude due to the pandemic must have hurt. In addition to this pain, the large public shale producers had many unhappy shareholders to deal with. They addressed it by cutting expenses, reducing production, and focusing on generating cash flow.
They did so largely with the help of OPEC +, which cut its combined production by an unprecedented 7.7 million bpd, and some non-OPEC producers who stepped in to take over. part of the burden. Since then, demand has recovered, as have prices. All eyes have been on the US shale for months now, expecting drillers to start ramping up drilling significantly. So far, the industry has defied expectations. But it looks like it’s not going to continue for long.
U.S. crude oil production set to increase 800,000 bpd next year, says Financial Times reported this week. This is hardly surprising given that U.S. oil prices are currently around $ 70 a barrel, making most shale wells profitable again, the report notes. But there is one interesting thing that is different this time around. According to an IHS Markit analyst, independent private drillers are leading the charge this time around.
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As interesting as this prediction is, it is hardly surprising. Even before the pandemic hit, disgruntled shareholders were making the city talk about shale oil. Years of spending money to ramp up production just for the United States to become the world’s largest oil producer never made sense with the shareholders who bought Pioneer Natural Resources, Devon Energy and Continental Resources . They bought these companies and their public peers for dividends.
Thus, when these dividends did not reach the size expected by shareholders, discontent increased. It also coincided with the growing popularity of the energy transition narrative, sparking concern that betting on shale oil is becoming increasingly dangerous in a changing energy world. The public shale drillers therefore had only one option: to start delivering.
They’ve been doing this for a while now. As Reuters recently reported, the big shale players have raised dividends and added things like variable distributions and share buybacks to keep shareholders on board while taking active steps to reduce their debt – a major cause for concern among shale investors.
So the public shale drillers have pampered shareholders after years of disappointment and even today continue to risk a backlash if they start drilling more. This, however, they will have to do soon as the inventory of drilled but unfinished wells decreases amid the return in demand. Shale drillers should therefore increase their spending to maintain production at current levels.
Meanwhile, small private drillers have clung to the skin of their teeth until the worst of the pandemic crisis collapses. Now that it’s behind them, their hands are untied to increase production as much as they want. Private drillers have no shareholders to report to. Their only concern is the market. If there is enough demand to push prices to a profitable level, then these companies will drill and pump more oil. And the demand outlook is rather optimistic.
No wonder then that, according to Raoul LeBlanc of IHS Markit, these independent shale oil-deprived independents are expected to account for more than half of the expected increase in crude oil production in the United States next year. That’s a 20% increase from any other year, LeBlanc noted, according to the FT.
âThe soldiers don’t agree with this whole thing about the discipline of capital. For them, it’s their window, âIHS analyst Markit told the FT. “They think, ‘here’s my chance and I’m going to take it’ because they may see it as their last and best chance.”
In January, as prices rose and WTI was trading at around $ 50, a Wood Mac analyst called it siren song – the price rally that was to put U.S. shale producers back into growth mode and put pressure on prices. This did not happen due to the new discipline of the capital of the majors. However, small producers are much more flexible since they have no shareholders to satisfy. And they might become a downside risk for too long.
Much of the shale oil has become profitable at prices of around $ 50. At $ 20 more, most shale oils are profitable. No one could blame the private independents for seizing the opportunity to monetize their oil assets, not with the long-term forecast – albeit more wishful thinking than forecasting – of the end of the oil age. .
By Irina Slav from OilUSD
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