The U.S. shale patch resists the temptation of a new drilling race

The U.S. stock market patch is holding large production hikes despite bumper profits and rising crude prices, as executives try to avoid being punished again for responding with quick investments.

Although U.S. crude oil prices have doubled in the past 12 months, the number of oil rigs in operation – just 373 last week, according to Baker Hughes – remains well below the levels of recent years. U.S. oil production is languishing nearly 15 percent below last year’s record close to 13m barrels per day.

Observers and industry insiders had expected a rapid recovery from the U.S. shale industry. Now tepid spending and slow oil field activity could leave supply short as demand picks up.

“We’re underinvested as an industry around the globe,” said Rick Muncrief, chief executive of Devon Energy, one of the largest shale producers in the United States.

Devon has however promised to keep production flat this year and limit any growth in 2022 to just 5 per cent – less than half the annual rate across the shale in the three years bumper production grew earlier. of the pandemic.

After years of spending, Devon is part of shale groups that are committed to using higher-priced bets to bolster their balance sheets and return capital to investors through dividends or share repurchases.

“The days of need to grow [production] at double-digit rates, it’s behind us, “Muncrief told the Financial Times.” The industry has overbaked too many times. ”

Shale’s spectacular production success in recent years has made the United States the world’s largest oil producer but has appealed to many of its investors. The sector has burned hundreds of billions of external capitals and failed to make a profit.

But the stock market is starting to reward companies willing to return capital and ignore the urge to launch another drilling race. Shares of shale producer Diamondback Energy have doubled this year and Devon’s are up nearly 90%.

The energy sector of the S&P 500, dominated by U.S. oil companies, outperformed all others this year, as the market approved the new low-growth mantra.

“If there was a moment to be tight.” [shale] oil, now is a good time, “said Robert Clarke, vice president of upstream research at Wood Mackenzie Council.” But why would you change the recipe? No drilling works in their favor. “

Graph growth line of the Index to date (%) showing energy stocks have outperformed the market this year

The reluctance of listed companies to risk these capital gains by increasing spending means that they are privately held operators – who do not face the same scrutiny as public companies – who have accounted for most of the modest increase in l activities in the oil fields this year, according to the Rystad Energy consultancy.

Some leaders believe that the inventory of high-quality – and highly profitable – rocks that bring shale into the United States is decreasing, hindering a recovery. While activity has resumed in the prolific Permian basin of New Mexico and Texas, it has been slower in other areas, such as the Bakken oil field in North Dakota, where the best surface has been drilled. .

Investors ’growing doubts about the long-term future of oil are also a factor, said Bradley Williams, chief executive of Elephant Oil & Gas, a private driller in Wyoming.

“Now it’s a real headwind,” he said. “To drill a lot of wells – where are we drilling?” Is it a constructive environment of commodity prices or will we see a rapid transition away from oil and gas that will result in low commodity prices and ultimately poor yields? “

Even companies like ExxonMobil, with a history of investments in periods of turbulence in the oil market, have been forced by shareholders to curb rising spending. In the Permian basin alone, Exxon expects in 2019 to increase production to 1m barrels per day by 2024. This year it has cut the target to 750,000 b / d.

“Now we’re basically $ 15 a barrel higher and those plans have been massively compressed, with no signs of coming back,” Clarke said.

Rystad said shale production could also grow up to 1m b / d next year if prices remain at current levels – less than the 1.2mb / d seen in 2019, when oil prices were lower.

At less than 1 percent of global demand, that increase in supply is unlikely to disrupt the Opec cartel, which meets this week to decide whether to raise its own production after more than a year of supply cuts. supports prices.

“I’m happy to push prices down because there’s no longer the fear of a shale response,” Williams said.

The Devon chief agreed that the cartel would be comfortable with the “measured” shale response to the last oil rally.

“I think they’ll have a collective sigh of relief,” Muncrief said.

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