The architects of the American shale revolution are following through on pledges to put investor returns above all else.
The Texas wildcatters that ushered in America’s shale revolution are resisting the temptation to pump more oil as the market rallies, signaling higher gasoline prices for consumers already battered by the worst inflation in a generation.
Crude prices hurtling toward $100 a barrel typically would spark a frenzy of new drilling by independent explorers in shale fields from the desert Southwest to the Upper Great Plains -- but not this year. Influential players like Pioneer Natural Resources Co., Devon Energy Corp., and Harold Hamm’s Continental Resources Inc. just pledged to limit 2022 production increases to no more than 5%, a fraction of the 20% or higher annual growth rates meted out in the pre-pandemic era.
The timing couldn’t be worse for consumers. Outside of OPEC, which has rejected U.S. President Joe Biden’s pleas to accelerate production increases, domestic shale fields are the only other source of crude that can quickly respond to supply shortfalls. Together with fast-rising global consumption, American drillers’ conservatism is likely to keep oil prices elevated for some time to come.
“Whether it’s $150 oil, $200 oil, or $100 oil, we’re not going to change our growth plans,’’ Pioneer Chief Executive Officer Scott Sheffield said during a Bloomberg Television interview. “If the president wants us to grow, I just don’t think the industry can grow anyway.’’
To be sure, U.S. oil output will rise substantially this year and is forecast to return to pre-pandemic levels by 2023. But it probably won’t be enough to knock oil prices off their upward trajectory any time soon.
Publicly-listed independent explorers like Pioneer and Devon account for more than half of the roughly 10.5 million barrels that America produces daily from fields in the contiguous 48 states, according to IHS Markit Ltd. The rest comes from closely held outfits, family-run enterprises and the international supermajors, all of which are aggressively boosting output.
Exxon Mobil Corp. and Chevron Corp., for example, are targeting 25% and 10% shale growth, respectively, this year. At the same time, closely-held entities bankrolled by private-equity firms and family funds now control the majority of the country’s active drilling rigs.
Going into this week’s quarterly earnings season, investors were apprehensive that the independents would evince signs of weakening discipline. After all, the benchmark North American oil price has surged 22% this year, at one point approaching $96 a barrel. That’s more than double the price needed to earn a healthy profit in places like the Permian Basin of West Texas and New Mexico. Retail gasoline at U.S. filling stations, meanwhile, is already higher than it’s been since 2014, an ominous sign in a market that closely tracks fluctuations in crude markets.
But the message from shale country is loud and clear: the independents won’t repeat the mistakes of the past by flooding the world with cheap oil. Record cash flows will go right back to investors through dividends and buybacks, CEOs are saying. That means U.S. drillers are leaving a lot of crude in the ground. If they chose the other path — pouring windfall profits into new drilling — they easily could inflate domestic production by 2 million barrels a day, according to IHS Markit. Current forecasts are for the U.S. to add less than half that to global supplies this year.
“We've had enough head fakes that we’re going to be very thoughtful in ramping activity up," Rick Muncrief, CEO of Devon Energy Corp., said during a phone interview. "Let’s face it: we all are recovering in one way or another from this pandemic. We’re just slowly getting healthier and healthier over time, but you don’t get there overnight.”
Such comments are a world away from the free-wheeling “drill, baby, drill’’ heyday earlier this century when shale upended global oil markets with year after year of record-high production. Seasoned CEOs like Muncrief, Sheffield, and Hamm have seen too many bust cycles to get carried away again.
The unprecedented oil price crash of 2020 exposed an industry that burned through more than $200 billion over the previous decade to make America the world’s biggest crude producer, leaving little left for shareholders. Even after the rally in oil stocks over the past year, U.S. energy companies are just 3.6% of the S&P 500 Index, down from more than 12% a decade ago.
“The growth experiment failed,” said Jeff Wyll, a senior analyst at fund manager Neuberger Berman Group LLC, which has about $400 billion of assets under management. “We are in a new paradigm.”
The U.S. will add between 750,000 and 1 million barrels of daily output this year, according to recent estimates from the Energy Information Administration, Rystad Energy AS, ESAI Energy LLC and Lium LLC. But that’s less than a third of the International Energy Agency’s forecast for global demand growth, meaning it won’t be enough to tame the oil rally.
It’s down to Saudi Arabia and the United Arab Emirates, the only two OPEC countries with significant spare capacity, to fill any supply gaps, according to Pioneer’s Sheffield. Crucially, independent U.S. drillers are still extremely wary of elbowing in on too much of the market share controlled by OPEC and its allies, which waged two price wars with shale in the space of less than 10 years.
“U.S. shale has lost twice already in a head-to-head battle with OPEC,’’ said Devin McDermott, an analyst at Morgan Stanley. Independent producers are “focused on cleaning up balance sheets, lowering break-even prices and returning cash back to investors -- not looking for growth.’’
Article Source: Bloomberg