Argus Media Limited

11/29/2021 | News release | Distributed by Public on 11/29/2021 08:55

US shale sector won’t answer Biden’s supply call

US shale oil is unlikely to ride to President Joe Biden's rescue if the planned release from the Strategic Petroleum Reserve (SPR) fails to rein in high oil prices.

Leading US oil lobby group the American Petroleum Institute says any impact from the SPR release is likely to be "short-lived unless it is paired with policy measures that encourage the production of American energy resources". The American Exploration and Production Council said in advance of the announcement that the Biden administration "should support made-in-America oil and natural gas as a tool to help keep energy costs low and stable".

Energy secretary Jennifer Granholm has called on oil companies to ramp up domestic production that is still lagging below pre-pandemic levels. But not only has the industry found itself on the back foot with an administration that has taken a tougher stance against drillers - at least by its rhetoric - it is also no longer in growth mode. Much to Wall Street's relief, most shale producers are reporting bumper cash flows buoyed by higher oil prices, with profits channelled to long-suffering investors who see no reason for the sector to spoil the party by driving up output. Capital expenditure plans unveiled so far for 2022 signal spending at less than half their 2014 peak, research firm CFRA analyst Stewart Glickman says.

Granholm doubles down on administration criticism of oil firms for generating "enormous profits" thanks to surging energy prices, but only using them "to engage in shareholder buy-backs, for example". The disconnect between White House calls for producers to ramp up output while the industry focuses on increasing investor returns, such as through higher dividends, can be seen in the lower amounts of cash being ploughed back in for fresh drilling. Reinvestment rates for shale producers - calculated by comparing capital spending against cash flow from operations - slumped in the third quarter, spurring record free cash flow, according to consultancy Rystad Energy. Rates for a group of 21 publicly traded shale producers fell to an all-time low of 46pc in the quarter, from 53pc in the same period of 2020, and far below a historical average of above 130pc.

"Such a low reinvestment rate stands out for shale industry observers, especially as the peer group reported record-breaking free cash flow and earnings before interest, tax, depreciation and amortisation of $6bn and $16bn, respectively," Rystad North America shale vice-president Alisa Lukash says. And reinvestment is expected to slide further this quarter, to just 40pc. For the first time since 2018, the group's combined net debt dropped below the eight-year average floor of $52bn. Meanwhile, third-quarter dividend payouts rose by 70pc on the quarter.

State of plays

While the Permian shale basin of west Texas and eastern New Mexico has made a strong comeback from the pandemic, with output expected to reach a record 4.95mn b/d next month, according to US government forecasts, other shale plays are struggling to regain their footing. Output in North Dakota's Bakken was at 1.1mn b/d in September, 25pc below its peak, and recent analysis by US-based think-tank the Institute for Energy Economics and Financial Analysis warns that a lack of high-quality drilling sites presents a further risk to production there.

US crude output is still well below the record highs seen before the pandemic, and what drilling increase there has been this year has been dominated by privately held firms with no public shareholders to answer to. Sector consolidation through mergers and acquisitions has centred largely on the Permian this year, with a focus on building scale and seeking opportunities to cut costs and drive efficiency gains. When Pioneer Natural Resources snapped up privately held DoublePoint Energy for $6.4bn in April, it promptly scaled back DoublePoint's aggressive growth plans.

By Stephen Cunningham

US tight oil production