Wednesday, December 4, 2019
(December 4, 2019) — U.S. shale production, the chief source of the rapid growth that made the U.S. the world’s largest oil producer, is slowing down fast, says a new report by the business information provider IHS Markit. Noted is that shale production, the engine driving rapid growth in recent years, is entering a new era of moderation in growth as producers focus on greater capital discipline and shareholder returns.
IHS Markit’s outlook for oil market fundamentals for 2019-2021 forecasts total U.S. production growth to be 440,000 bbld in 2020 before essentially flattening out in 2021. Modest growth is expected to resume in 2022, but those volumes will be in stark contrast to the boom levels of recent years, said Raoul LeBlanc, vice president of North American unconventionals at IHS.
“Going from nearly 2 MMbbld annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” said LeBlanc. “This is a dramatic shift after several years where annual growth of more than 1 MMbbld was the norm.”
The key challenge for producers now is to meet investors’ new focus on return of capital. This comes at a time when companies are facing a prolonged period of lower prices and when access to financing from capital markets has become difficult, the report says. Exploration and production (E&P) companies are trading at multiples that are half to one-third of what they were in 2017, and debt markets are unwilling to provide fresh debt for all but the largest shale players.
“The combination of closed capital markets and weak prices is pulling cash out of the system,” LeBlanc maintains. “Investors are imposing capital discipline on E&Ps by pushing down equity prices and pushing up the cost of capital on debt markets.” In turn, these financial trends will impact operations. With West Texas Intermediate crude oil prices expected, at this point, to average around $50/bbl in 2020 and 2021, IHS Markit forecasts capital spending for onshore drilling and completions to fall by 10% to $102 billion this year, another 12% to about $90 billion in 2020, and another 8% to around $83 billion in 2021—a nearly $20-billion decline in annual spending over just three years.
“It all represents the strongest headwinds for shale producers since the oil price collapse in 2015,” says LeBlanc. Aggravating the situation is that some options for weathering the storm that worked previously will not be available this time, asserts the IHS Markit report.
“Operators were able to outperform the price collapse in 2015-2016 because they were able to vastly outspend cash flow thanks to accommodative debt and equity markets, while at the same time achieving huge leaps in well productivity and capital efficiency,” LeBlanc explains. “This time around, capital markets are skeptical and wary, and the scope for further productivity gains is limited.”
Nevertheless, the industry retains the ability to still grow rapidly under the right conditions, the report adds. The analysis shows that a $65/bbl oil price would provide the ability to post strong volume growth while also providing meaningful returns to shareholders. The crucial tipping point for this new shale era appears to be oil prices somewhere in the mid-$50s/bbl, the point where it remains viable to have both some production growth and deliver shareholder returns.
“There is certainly ample inventory of high-quality wells out there,” LeBlanc observes. “Shale producers are making a deliberate change to the business model in response to investor demands. The question becomes, what are the new conditions for growth? The answer is that now the trajectory of production depends almost entirely on the oil price.”
(SOURCE: The Weekly Propane Newsletter, December 2, 2019. Available by subscription.)
IHS Markit’s outlook for oil market fundamentals for 2019-2021 forecasts total U.S. production growth to be 440,000 bbld in 2020 before essentially flattening out in 2021. Modest growth is expected to resume in 2022, but those volumes will be in stark contrast to the boom levels of recent years, said Raoul LeBlanc, vice president of North American unconventionals at IHS.
“Going from nearly 2 MMbbld annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” said LeBlanc. “This is a dramatic shift after several years where annual growth of more than 1 MMbbld was the norm.”
The key challenge for producers now is to meet investors’ new focus on return of capital. This comes at a time when companies are facing a prolonged period of lower prices and when access to financing from capital markets has become difficult, the report says. Exploration and production (E&P) companies are trading at multiples that are half to one-third of what they were in 2017, and debt markets are unwilling to provide fresh debt for all but the largest shale players.
“The combination of closed capital markets and weak prices is pulling cash out of the system,” LeBlanc maintains. “Investors are imposing capital discipline on E&Ps by pushing down equity prices and pushing up the cost of capital on debt markets.” In turn, these financial trends will impact operations. With West Texas Intermediate crude oil prices expected, at this point, to average around $50/bbl in 2020 and 2021, IHS Markit forecasts capital spending for onshore drilling and completions to fall by 10% to $102 billion this year, another 12% to about $90 billion in 2020, and another 8% to around $83 billion in 2021—a nearly $20-billion decline in annual spending over just three years.
“It all represents the strongest headwinds for shale producers since the oil price collapse in 2015,” says LeBlanc. Aggravating the situation is that some options for weathering the storm that worked previously will not be available this time, asserts the IHS Markit report.
“Operators were able to outperform the price collapse in 2015-2016 because they were able to vastly outspend cash flow thanks to accommodative debt and equity markets, while at the same time achieving huge leaps in well productivity and capital efficiency,” LeBlanc explains. “This time around, capital markets are skeptical and wary, and the scope for further productivity gains is limited.”
Nevertheless, the industry retains the ability to still grow rapidly under the right conditions, the report adds. The analysis shows that a $65/bbl oil price would provide the ability to post strong volume growth while also providing meaningful returns to shareholders. The crucial tipping point for this new shale era appears to be oil prices somewhere in the mid-$50s/bbl, the point where it remains viable to have both some production growth and deliver shareholder returns.
“There is certainly ample inventory of high-quality wells out there,” LeBlanc observes. “Shale producers are making a deliberate change to the business model in response to investor demands. The question becomes, what are the new conditions for growth? The answer is that now the trajectory of production depends almost entirely on the oil price.”
(SOURCE: The Weekly Propane Newsletter, December 2, 2019. Available by subscription.)
