Shale oil companies are ready to play chicken with supply and demand again.
Roiled by a year that began with crude at a 12-year low and ended
with a surprise OPEC agreement boosting prices, U.S. producers including
Continental Resources Inc. and Pioneer Natural Resources Co. are
promising not to overreact — or overspend.
The temptation will be strong: a recovery in prices has already
spurred drilling activity in the U.S. to the highest since January. If
oil passes $70 a barrel, the U.S. could start pumping out an extra
million barrels a day, offsetting much of the planned cut from the
Organization of Petroleum Exporting Countries, according to a Citigroup
Inc. analysis. With President-elect Donald Trump promising to ease
industry regulations and analysts predicting better earnings for 2017,
shale drillers are gearing up for growth.
“There’s a real concern by industry that we could be in for another
one of these price adjustments, if we get carried away with
development,” Harold Hamm, chief executive officer of Oklahoma-based
Continental, said in an interview in New York. “They’re going to be
disciplined going forward.”
The U.S. now produces 8.8 million barrels a day, about half from
shale. West Texas Intermediate oil, a U.S. benchmark, has averaged
almost $52 a barrel since OPEC’s announced cut last month. A climb to
$60 could generate a 500,000 barrel surge in U.S. production and $70
would double that, Citigroup wrote in a report this month. WTI traded at
$53.81 at 12:32 p.m. Singapore time Thursday.
While dozens of shale companies and oilfield servicers went bankrupt
in the aftermath of the price collapse, investors have rewarded
survivors who emerged leaner and more efficient. Hamm’s Continental,
holder of the largest net acreage in North Dakota’s Bakken Shale region,
has more than doubled in value this year. Hamm himself, who owns the
majority of the company’s shares, had the third-largest personal gain
among billionaires in 2016.
A Bloomberg Intelligence index of 57 independent oil and gas drillers
in North America has gained 72 percent this year, with all but 10 of
the stocks posting an increase for the year. On average, members of the
index are expected to lose $1.48 a share in 2016, according to analysts’
estimates. That will improve to a 35-cent average loss next year. The
five largest companies are expected to swing to a full-year profit in
2017 on a per-share basis.
Also buttressing cash flow, U.S. producers have been buying hedging
contracts that lock in higher prices for 2017, giving them further
financial flexibility to grow, Macquarie Research analysts Vikas Dwivedi
and Walt Chancellor noted in a Dec. 12 report to clients.
‘Shale’s Reflexes’
The issue for the global industry now isn’t whether U.S. drillers
will expand their operations, but rather “how quickly does shale come on
to tap those higher prices, and then how quickly they push them back
down,” said Peter Pulikkan, a Bloomberg Intelligence analyst in New
York. “2017 is the year where you are going to see shale’s reflexes
tested.”
Producers are waiting to see whether OPEC delivers on its promised
cuts before increasing their own development budgets, according to
Pulikkan. It may be the second quarter before enough market data is in
to reach a conclusion, he said.
Pioneer Natural Resources can go from starting a well to producing
oil for sale in three to four months, Chief Operating Officer Tim Dove
told Bloomberg Television in a Dec. 13 interview. The Irving,
Texas-based company was already planning to boost production by 15
percent and add rigs next year in West Texas’ Permian shale basin. It’s
taking a wait-and-see approach on any further expansion, he said.
“We’re going to stay on our trajectory regardless of what OPEC does,” Dove said.
‘Modest Increase’
Expansion may be steady but slow, said John England, vice-chairman
for U.S. energy at Deloitte LLP. He expects just a “modest increase”
from shale drillers in 2017.
“We see 2017 as the slow road back,” England said in a telephone
interview. “Nobody wants to get overextended, nobody wants to get into
the debt levels you’ve seen in the past.”
In the meantime, another wild card for oil markets will hit
Washington. Trump is considering a tariff on imports, CNN reported on
Dec. 21, citing unidentified sources, and House Republicans have
proposed a “border adjustment” that would tax imported goods but not
exports, including oil and gas. Either move could spur U.S. production.
Adam Anderson, chief executive officer of oilfield equipment company
Innovex Downhole Solutions Inc., remains skeptical he’ll ever see
business boom the way it did when almost 2,000 oil and gas rigs were
drilling in 2014.
After years of turmoil, “clearly we’re past the worst of it,”
Anderson said in an interview. “But it is not back, nor do I think it
ever will get back, to the heights.”
