Big Shale Turns OPEC Ally From Foe With Focus on Oil Returns
(Bloomberg) -- Don’t expect Big Shale to rush and fill the hole left by OPEC in the oil market.
Executives from three of the biggest independent U.S. drillers say they won’t increase activity just because prices rise after the Organization of Petroleum Exporting Countries and its allies agreed to extend output curbs. The emphasis, instead, will be on maintaining spending discipline and generating profits to return to investors, according to Pioneer Natural Resources Co., Parsley Energy Inc. and Newfield Exploration Co.
While crude is trading near the highest level in more than two years as OPEC and its partners limit supplies in a bid to drain a global glut, investors have been concerned stronger prices would encourage U.S. drilling and undermine those efforts. The biggest oil crash in a generation began in 2014 as a boom in American shale output spawned a race for market share between global producers.
“Higher oil prices can bring in more cash to the balance sheet, and you can enjoy that cushion, but there’s no need to chase additional activity,” Matt Gallagher, Parsley’s chief operating officer, told Bloomberg on the sidelines of Van Eck Associates Corp.’s U.S. Shale Forum in Singapore. “It’s paramount that you’ve got to be disciplined and give visibility on spending.”
That’s not to say the companies won’t grow. Pioneer, which drills in the Permian Basin and Eagle Ford shale plays, plans to boost output from about 300,000 barrels of oil equivalent a day this quarter to more than 1 million by 2026, Chief Financial Officer Richard Dealy said. Parsley also drills in the Permian, while Newfield is focused on the SCOOP and STACK plays in Oklahoma.
Cash Flow
The difference now is that shale drillers want to grow while generating free cash flow to return to investors via dividends or share buy-backs, said Shawn Reynolds, Van Eck’s portfolio manager for hard assets. In years past, companies routinely outspent their cash flow by 20 to 30 percent in an attempt to grow production as fast as possible.
“I hope they are more disciplined this time around,” Pioneer’s Dealy said. “If oil prices are higher, that means our cash flow may turn positive that much sooner, but no real change in activity level.”
Last week’s decision by OPEC and its partners including Russia could potentially harm shale, Van Eck’s Reynolds said. While companies with the most efficient operations and richest acreage can profit at an oil price of $50 a barrel, rising prices may mean hundreds of other small independent drillers with lower-quality sites could begin to break even on production and start drilling again, increasing costs for everyone. West Texas Intermediate futures traded at $57.81 a barrel at 10:20 a.m. London time.
“I don’t like $27 oil, but I don’t like $80 oil either,” Gary Packer, chief operating officer for Newfield, said in an interview. “Inefficiencies get bred into this industry at high commodity prices, and I think we have built efficiencies within the unconventional space to deliver exciting returns for our shareholders in a $50 environment.”
Shifting Strategy
As U.S. output increased, OPEC in late 2014 decided to pump at will to defend market share, exacerbating the price collapse that sent several shale companies into bankruptcy.
U.S. production has rebounded since OPEC reversed course last year and decided to cut output to force the world to burn through a glut of global inventories. Thursday’s extension, which will prolong curbs from March 31 to the end of 2018, will allow American firms to raise supplies even more and steal market share from OPEC in places like China, Barclays Plc analysts Michael Cohen and Warren Russell said in a Nov. 30 report.
That idea is tied to the past, though, Newfield’s Packer said. The shale industry of old was able to generate phenomenal growth at the expense of providing sound financial returns. The focus now is on the bottom line.
“What we’re hearing today from our investors is they want to see more discipline,” he said. “If investor behaviors change and they start rewarding production growth again, it can be a different outcome, but that’s not the narrative that we have today.”
To contact the reporters on this story: Serene Cheong in Singapore at scheong20@bloomberg.net; Sharon Cho in Singapore at ccho28@bloomberg.net; Dan Murtaugh in Singapore at dmurtaugh@bloomberg.net. To contact the editor responsible for this story: Pratish Narayanan at pnarayanan9@bloomberg.net.
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.
- Gunvor CEO Sees Russian Refining Capacity Taking Hit from Drone Strikes
- These Factors Helped Brent Oil Price Break Above $85
- Sinopec Engineering Posts Higher Annual Petrochemicals Revenue
- Imperial Pipeline in Winnipeg Goes Offline for Three Months
- Gaz System to Acquire Gas Storage Poland
- Subsea7 Secures Contract to Service Woodside's Trion
- Adnoc Inks Supply Deal for Ruwais LNG Project with Germany's SEFE
- EIA Boosts USA Crude Oil Production Forecasts
- TotalEnergies to Acquire TLCS Eyeing Bayou Bend CCS Project
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- EIA Drops 2024 Henry Hub Gas Price Forecast
- EIA and Standard Chartered Offer Up Latest Oil Price Predictions
- Red Sea Region Sees Another Watershed Incident
- Chevron Oil Project in Kazakhstan to Cost $48.5B
- OPEC Voices Encouragement after IEA Affirms Support for Oil Security
- Biden Govt Bares Strategy for Freight Charging, Hydrogen Fueling Infra
- Rystad Looks at the Buzz Around White Hydrogen
- Ukraine Hits Third Russian Refinery In Escalating Drone Strikes
- VIDEO: Missile Attack Kills Crew Transiting Gulf of Aden
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- What Is the Biggest Risk to Offshore Oil and Gas Personnel in 2024?
- Is Peak Oil Demand Close?
- Vessel Sinks in Red Sea After Missile Strike
- JP Morgan, Standard Chartered Reveal Latest Oil Price Forecasts
- Exxon Rights in Stabroek Do Not Apply to Hess Merger with Chevron: Hess
- Rystad Forecasts Net Production of Top Permian Producers in 2024
- Analysts Reveal Latest Oil Price Outlook Following OPEC+ Cut Extension