US shale industry faces endurance test after Opec rejects cuts –

US shale industry faces endurance test after Opec rejects cuts –


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When Saudi Arabia and other Gulf countries last month rejected calls for a production cut by Opec, the oil cartel, they put the responsibility for stabilising plummeting crude prices on to the US shale industry. Suhail al-Mazroui, energy minister for the United Arab Emirates, said US shale companies and other producers who had created an oil glut should “respect the needs of the market”. Less diplomatically, Scott Sheffield, chief executive of Pioneer Natural Resources, one of the leading shale oil producers, said Opec had “declared war” on the US industry.

Two weeks on from that Opec decision — and against a backdrop of a 40 per cent fall in the oil price since June — evidence of its negative impact on US producers is starting to emerge.

Rather than a war, the US shale industry is braced for a test of endurance. As the pressure on oil producers mounts, weak companies face the threat of dwindling investment, faltering production, forced asset sales and possible bankruptcy.

The successful companies will be the ones that both entered the downturn in the strongest position and are most effective at improving their efficiency. They can hope to make it through to better days when the oil price recovers and are also likely to be able to pick up some undervalued assets.

On Monday ConocoPhillips, the US’s largest exploration and production company, unveiled plans to cut its capital spending by about 20 per cent next year to $13.5bn — a steeper reduction than analysts had expected — and said it would defer drilling programmes in several North American shale areas.

Last Friday Baker Hughes, the energy services group due to be bought by rival Halliburton, published data which showed the number of rigs drilling for oil in the Eagle Ford shale of south Texas had fallen by 16 since October to 190. The number of rigs in the Bakken shale and related North Dakota formations had meanwhile dropped by 10 to 188.

Also last week Drillinginfo, a consultancy, published figures showing that the number of applications for permits to drill new wells had fallen by about 30 per cent in both the Bakken and the Eagle Ford areas last month compared with October. That may overstate the likely drop in activity, because companies will have a backlog of permits they can use, but it is clear the industry is responding to a steep drop in the oil price.

Allen Gilmer, Drillinginfo’s chief executive, said: “Because production from shale wells comes on fast and drops off fast, their economics are more exposed to short-term prices.” This applies more than for other types of oil production, where projects can take many years to come on stream, activity and output from shale can be stepped up and down quickly.

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While all shale companies are under pressure, their responses to the declining oil price will often be different. The companies vary widely in terms of debt levels, financing, hedging against price falls, product mix, location and quality of their assets and operational efficiency, and those differences have been reflected in share price movements over the past six months.

One important issue for companies is their gas production. From 2010 until this summer, many US shale companies were shifting away from natural gas and towards more lucrative oil production.

But now gas is back in favour. It has fallen less than oil and is likely to rebound if there is a cold winter in the US. As a result, the shares of gas-focused companies such as Cabot Oil and Gas have often been less affected than their more oil-focused peers.

Another critical factor is debt. The shale surge has been built by borrowing: companies have typically spent more on drilling and completing wells than they have generated in cash flows and over the past decade about $163bn worth of high-yield debt has been issued by US oil and gas producers. Some have relied much more heavily on debt than others, however.