Shale Drillers Promise No 2017 Binges as Oil Hangover Eases

Shale Drillers Promise No 2017 Binges as Oil Hangover Eases
Roiled by a year that began with crude at a 12-year low and ended with a surprise OPEC agreement boosting prices, US producers are promising not to overreact - or overspend.

(Bloomberg) -- Shale oil companies are ready to play chicken with supply and demand again. 

Roiled by a year that began with crude at a 12-year low and ended with a surprise OPEC agreement boosting prices, U.S. producers including Continental Resources Inc. and Pioneer Natural Resources Co. are promising not to overreact -- or overspend.

The temptation will be strong: a recovery in prices has already spurred drilling activity in the U.S. to the highest since January. If oil passes $70 a barrel, the U.S. could start pumping out an extra million barrels a day, offsetting much of the planned cut from the Organization of Petroleum Exporting Countries, according to a Citigroup Inc. analysis. With President-elect Donald Trump promising to ease industry regulations and analysts predicting better earnings for 2017, shale drillers are gearing up for growth.

“There’s a real concern by industry that we could be in for another one of these price adjustments, if we get carried away with development,"  Harold Hamm, chief executive officer of Oklahoma-based Continental, said in an interview in New York. “They’re going to be disciplined going forward."

The U.S. now produces 8.8 million barrels a day, about half from shale. West Texas Intermediate oil, a U.S. benchmark, has averaged almost $52 a barrel since OPEC’s announced cut last month. A climb to $60 could generate a 500,000 barrel surge in U.S. production and $70 would double that, Citigroup wrote in a report this month. WTI traded at $53.81 at 12:32 p.m. Singapore time Thursday.

While dozens of shale companies and oilfield servicers went bankrupt in the aftermath of the price collapse, investors have rewarded survivors who emerged leaner and more efficient. Hamm’s Continental, holder of the largest net acreage in North Dakota’s Bakken Shale region, has more than doubled in value this year. Hamm himself, who owns the majority of the company’s shares, had the third-largest personal gain among billionaires in 2016.

A Bloomberg Intelligence index of 57 independent oil and gas drillers in North America has gained 72 percent this year, with all but 10 of the stocks posting an increase for the year. On average, members of the index are expected to lose $1.48 a share in 2016, according to analysts’ estimates. That will improve to a 35-cent average loss next year. The five largest companies are expected to swing to a full-year profit in 2017 on a per-share basis.

Also buttressing cash flow, U.S. producers have been buying hedging contracts that lock in higher prices for 2017, giving them further financial flexibility to grow, Macquarie Research analysts Vikas Dwivedi and Walt Chancellor noted in a Dec. 12 report to clients.

‘Shale’s Reflexes’

The issue for the global industry now isn’t whether U.S. drillers will expand their operations, but rather “how quickly does shale come on to tap those higher prices, and then how quickly they push them back down,” said Peter Pulikkan, a Bloomberg Intelligence analyst in New York. “2017 is the year where you are going to see shale’s reflexes tested."

Producers are waiting to see whether OPEC delivers on its promised cuts before increasing their own development budgets, according to Pulikkan. It may be the second quarter before enough market data is in to reach a conclusion, he said.

Pioneer Natural Resources can go from starting a well to producing oil for sale in three to four months, Chief Operating Officer Tim Dove told Bloomberg Television in a Dec. 13 interview. The Irving, Texas-based company was already planning to boost production by 15 percent and add rigs next year in West Texas’ Permian shale basin. It’s taking a wait-and-see approach on any further expansion, he said.

“We’re going to stay on our trajectory regardless of what OPEC does," Dove said.


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Copyright 2016 Bloomberg News.

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