Higher oil prices signal a recovery in US oil production next year, but growth will be slow as shale firms keep a tight grip on spending.
Oil prices are rising and cash flow growing in the US shale sector. But producers say they will remain focused on cutting costs and rebuilding corporate balance sheets after sharply reducing spending in response to this year's oil demand and price shock. "Going into 2021, our view of the macro situation is we will still largely be at an oversupplied market next year," EOG Resources chief operating officer Billy Helms says. "So we do not anticipate growing volumes next year until we see the market conditions improve."
Independent shale-focused oil and gas firms cut capital expenditure (capex) to its lowest in over a decade last quarter, the US-based Institute for Energy Economic and Financial Analysis (IEEFA) says. Capital spending was down by 58pc year on year in the quarter for a group of 33 producers tracked by the IEEFA, following a 44pc decline in the second quarter when oil prices slumped. But higher prices in the third quarter and even deeper spending cuts yielded "the strongest cash flow results since the dawn of the fracking boom", the IEEFA says (see graph). Free cash flow — cash generated from operations minus capital investment — measures a company's ability to pay down debt and reward shareholders.
Shale firms have spent more than they earned in the pursuit of faster growth over the past decade and can no longer persuade banks and private equity to finance investment in drilling new wells. Over 250 North American exploration and production firms have filed for bankruptcy since 2015, US law firm Haynes & Boone says. And those that survive now recognise that they must reward shareholders.
Shale firms are expected to keep a tight grip on spending next year, consultancy Rystad Energy says. Third-quarter guidance from 23 oil-focused producers accounting for 41pc of this year's US shale oil production indicates a further 13pc fall in drilling and completion capex in 2021. But Permian operators still expect a 2pc increase in output next year, despite spending cuts, as they continue to drive down their production costs.
Slow recovery
Activity continues to recover slowly in the shale sector this quarter as more wells are drilled and completed. But new-well output still lags legacy declines at existing wells in all seven shale regions covered by the EIA's Drilling Productivity Report (DPR). The EIA expects total oil output in the seven regions to fall by 130,000 b/d month on month in December-January, leaving production 1.6mn b/d lower than a year earlier. New-well output of 320,000 b/d last month was only half of where it was a year ago and 60pc fewer wells were completed. Legacy declines did ease by around a third over the same period owing to lower output and improved well productivity. But companies still need to do more before production increases again.
Oil rig counts rose again this month to levels last recorded in May, service company Baker Hughes says. But present levels are only just over a third of pre-crisis levels in March, while the number of "frac spreads" or completion crews deployed to bring new wells on stream continues to increase faster than rig counts. The frac spread count reached around half pre-crisis levels this month, industry monitor Primary Vision says (see graph). Operators in the seven DPR regions are completing more wells than they are drilling, using up their inventory of "drilled-but-uncompleted" (DUC) wells, because this is cheaper than drilling and completing a new well from scratch. If oil prices continue to gain ground, firms may be tempted to spend a little more next year.
