It'll Take Oil Above $50 for Shale Boom, Oil Sands to Pay Off
(Bloomberg) -- Shale drillers and oil sands producers have posted some healthy profits so far this year, but it’ll take oil consistently above $50 a barrel for their investments to pay off in the long run.
That’s the conclusion of a Moody’s Investors Service study of 37 exploration and production companies in the U.S. and Canada. It used a measure of how efficiently cash is generated to cover the costs of leasing drilling rights and boring wells, and still have enough left over to invest in future projects.
Producers in the U.S. and Canada have made dramatic efforts to cut costs since the collapse of oil prices three years ago, with many emerging from the downturn delivering higher dividends to investors this year. But with limited wiggle room to reduce costs further, any improvement in their ability to sustain healthy returns will have to come from commodity prices, Moody’s analysts Sreedhar Kona and Steven Wood said in the report.
“Companies will be able to demonstrate meaningful capital efficiency, measured by the leveraged full cycle ratio, only if the West Texas Intermediate oil price is above $50 per barrel and the Henry Hub natural gas price is at least $3.00 per million British thermal units,” the analysts said.
With a few notable exceptions like Appalachian explorers Antero Resources Corp. and Range Resources Corp., as well as Canadian shale gas producer Seven Generations Energy Ltd., the ratio for the vast majority was way below a level Moody’s considers healthy.
Interestingly, the three best performers are focused on liquids-rich gas plays -- the Marcellus and Utica formations in the northeastern U.S. and the Montney shale in Alberta. Antero and Seven Generations have seen their cash flow from operations surge over the past few years, according to data compiled by Bloomberg.
Producers’ leveraged full cycle ratio needs to be significantly above 1 for explorers to earn a meaningful return on their investment, the Moody’s analysts said. The average for the 37 explorers was 0.59 last year, according to the study. The ratios for the top three performers were above 1.5. Antero’s 2.19 ratio tops the list.
Among the lowest ranking were Apache Corp. and Devon Energy Corp., with ratios below 0.05, according to the report.
To contact the reporter on this story: Carlos Caminada in Calgary at ccaminada1@bloomberg.net To contact the editors responsible for this story: Carlos Caminada at ccaminada1@bloomberg.net Joe Carroll, Jim Efstathiou Jr.
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
- How Likely Is an All-Out War in the Middle East Involving the USA?
- Rooftop Solar Now 4th Largest Source of Electricity in Australia
- US Confirms Reimposition of Oil Sanctions against Venezuela
- EU, Industry Players Ink Charter to Meet Solar Energy Targets
- Analyst Says USA Influence on Middle East Seems to be Fading
- Russian Ships to Remain Banned from US Ports
- Brazil Court Reinstates Petrobras Chair to Divided Board
- EIB Lends $425.7 Million for Thuringia's Grid Upgrades
- Var Energi Confirms Oil Discovery in Ringhorne
- Seatrium, Shell Strengthen Floating Production Systems Collaboration
- An Already Bad Situation in the Red Sea Just Got Worse
- What's Next for Oil? Analysts Weigh In After Iran's Attack
- USA Regional Banks Dramatically Step Up Loans to Oil and Gas
- EIA Raises WTI Oil Price Forecasts
- How Likely Is an All-Out War in the Middle East Involving the USA?
- Venezuela Authorities Arrest Two Senior Energy Officials
- Namibia Expects FID on Potential Major Oil Discovery by Yearend
- Oil Markets Were Already Positioned for Iran Attack
- Is The Iran Nuclear Deal Revival Project Dead?
- Petrobras Chairman Suspended
- Oil and Gas Executives Predict WTI Oil Price
- An Already Bad Situation in the Red Sea Just Got Worse
- New China Climate Chief Says Fossil Fuels Must Keep a Role
- Oil and Gas Execs Reveal Where They See Henry Hub Price Heading
- Equinor Makes Discovery in North Sea
- Macquarie Strategists Warn of Large Oil Price Correction
- DOI Announces Proposal for Second GOM Offshore Wind Auction
- Standard Chartered Reiterates $94 Brent Call
- Chevron, Hess Confident Embattled Merger Will Close Mid-2024
- Analysts Flag 'Remarkable Feature' of 2024 Oil Price Rally