Some critics have described the industry as a “Ponzi scheme”, relying on the excitement over the shale boom to attract new investment, and warned that it could collapse when companies ran out of financing to drill more wells. However, shale companies’ finances have improved rapidly as a result of a shift by many away from natural gas towards more lucrative oil production and a pick-up in natural gas prices after they fell to 10-year lows in 2012.
Analysts’ consensus forecasts now indicate that the leading shale companies’ operating cash flows in 2015 will show an excess of about $2.4bn over their capital spending – compared with a shortfall of about $32.2bn in 2012, and $8.8bn last year.
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In 2012, only two of the 25 leading companies could cover their capital spending from their operating cash flows, and this year that number is expected to rise to 10.
Chesapeake Energy, the second-largest gas producer in the US, in 2012 had capital spending almost $12bn ahead of its cash flow from operations, but this year and next it is expected to be able to cover its spending almost entirely from its income.
Phani Gadde, an analyst at Wood Mackenzie, the consultancy, said there were “very positive” signs that shale companies would be able to cover their drilling programmes from their own cash flows within three years, supporting his forecast that US shale and related “tight” oil production would grow from 3.4m barrels per day in 2014 to 5.8m b/d in 2020.
But Bill Powers, an independent energy analyst who believes US shale production is likely to peak soon, said many smaller oil and gas companies were still facing financial strain.
He cited the example of Kodiak Oil and Gas, which operates in the Bakken shale of North Dakota and recently agreed a takeover from its rival Whiting Petroleum.
“This was a company that had its back to the wall,” Mr Powers said. “Its remaining options were not attractive, so it sold itself.”