Is America's Oil Producer Status Now at Risk?

Is America's Oil Producer Status Now at Risk?
Most shale wells are now unprofitable and drillers are scrambling to scale back operations.

(Bloomberg) -- For more than two years, the U.S. has been the world’s No. 1 oil producer, a status often hailed proudly by President Donald Trump. Now, the crown is at risk.

The standing of the U.S. has largely been based on a concession from Saudi Arabia, which orchestrated output curbs in tandem with Russia that helped prop up prices. But with the Saudis now threatening to flood the world with oil after its production pact fell apart, prices are in free-fall, having dropped by half in two months to around $30 a barrel.

The result: Most shale wells are now unprofitable and drillers are scrambling to scale back operations. At $35 a barrel, U.S. output -- now about 13 million barrels a day -- could fall by 1 million barrels this year, according to BloombergNEF, and by 2.5 million in 2021, said Scott Sheffield, who heads one of the biggest independent shale producers. Meanwhile, the Saudis have vowed to supply 12.3 million barrels daily.

“It’s all about getting by,” Sheffield, the chief executive officer at Pioneer Natural Resources Co., said in an interview Tuesday on Bloomberg TV. He sees most companies “going into maintenance mode” until prices rise, adding, “nobody wants to increase the balance sheet in this environment.”

Sheffield’s not alone in his estimate. Rystad Energy, an Oslo-based industry consultant, sees a 2-million barrel drop next year if prices remain below $35, while BloombergNEF predicts a 1.5 million drop by the end of 2021 for the four top shale fields. Meanwhile, Goldman Sachs Group Inc. on Sunday said it sees Brent, the global benchmark, sitting at $30 through the third quarter.

Shale explorers reacted almost immediately to the price crash.

Occidental Petroleum Corp. on Tuesday cut its dividend for the first time in at least 20 years, opting to conserve cash to cover its debt. Parsley Energy Inc. and Diamondback Energy Inc. both said they would curtail drilling and fracking for the rest of this year. Overall, the industry could cut the number of frack crews in U.S. shale fields by half this year to 140, according to an estimate by Coras Oilfield Research.

That large a drop in activity could quickly threaten America’s nascent status as a net petroleum exporter, achieved only in the last few months. Last week, the U.S. was a net exporter of 1.52 million barrels a day of crude and refined products.

Industry Resilience

Still, the U.S. shale industry has shown extraordinary resilience in the past.

In early 2016, the industry was in tatters when crude plunged to about $30 a barrel. That’s when the Saudis stepped in, building a coalition that tied OPEC to Russia and other countries in a move that limited global production, boosting prices. Meanwhile, shale producers became increasingly more efficient at shaking loose the oil hidden in the ground below.

Production could continue to rise in the short term this year before it starts to fall, according to Rystad. Moving forward, though, with the Saudis and Russia feuding, the U.S. industry is caught in the middle with a lot less room to maneuver.

The sector has found itself on a treadmill of sorts, with fracked wells experiencing steep declines over time compared with conventional wells. That’s compelling shale producers to keep drilling simply to maintain output levels and cash generation.

Investor Favor

At the same time, shale explorers were already falling out of favor before the price crash, with investors demanding they focus on delivering free cash flow and returns, rather than burn borrowed cash to grow. The S&P index of oil and gas explorers, which declined more than 40% over the last three years, has plunged 62% so far in 2020.

In the bond market, the rout triggered by the global virus outbreak was already pushing the debt of many explores to distressed levels. The median yield on bonds of drillers with a market value below $500 million was at about 30% last week, at par with government bonds issued by Lebanon, according to data compiled by Bloomberg.

This week investors are demanding a median risk premium of 45% to take the securities.

Now concerns are growing that the number of sector bankruptcies will rise, though that’s a factor that would likely take six months or more to wind out. “I wouldn’t be surprised to see 55 to 60 bankruptcies” this year, compared with 50 last year, said Raoul Nowitz, managing director of restructuring and distressed asset support services at SOLIC Capital.

That number may grow if the price slump persists for an extended period, Nowitz said.

To contact the reporter on this story:
Carlos Caminada in Calgary at

To contact the editors responsible for this story:
Simon Casey at
Reg Gale


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