US Frackers shows restraint as oil hits $70

[ad_1]

Shale oil companies are giving up any time oil prices have risen sharply in the past decade. But with the price of crude oil soaring to $70 a barrel, they are barely doing enough to maintain US production.

Frackers have been forced to rein in spending and live within their means after many investors lost faith in companies after years of poor returns, lenders cut their lines of credit and capital markets showed little interest in financing new, expanded drilling.

The result is that shale rigs, which in the past played the role of swing producer in the oil world by rapidly ramping up production to meet demand, are still largely in place for now, as the reopening of Western economies leads to a resurgence of global oil and gas prices.

Companies are making more money than ever before. Combined, public shale oil companies primarily drilling for oil generated a record $4.1 billion in free cash flow in the first quarter of 2021, and are expected to earn nearly $15 billion for the year if prices remain high. According to consulting firm Rystad Energy.

But rather than pour that money back into exploration as they have historically done, major producers like Occidental Petroleum Corp. said. OXY 0.61% and Ovintiv Inc. , the company formerly known as Encana Corp. They said they plan to focus on reducing debt, keeping US output steady. Other large shale drilling rigs such as Pioneer Natural Resources Co. PXD 0.03% and Devon Energy Corp. DVN 0.84% ​​makes money to return to investors in the form of variable dividends, which is one of the inducements they want to use to attract more investors to return.

“We’re generating all this free cash flow, but it’s not going to investors yet,” said Scott Sheffield, CEO of Pioneer, noting that many companies focus on debt before they return the money to investors. “There is no reason for them to buy into this sector at this time.”

“We’re generating all that cash flow, but it’s not going to investors yet,” says Scott Sheffield, CEO of Pioneer. Photo: Trevor Bullhaus for The Wall Street Journal

Even with oil prices hitting a six-year high last week, many drilling rigs are still out of order. The United States is producing about 2 million barrels less per day than it was before the pandemic. The number of active rigs drilling for oil reached 376, down from 683 before Covid-19, according to oilfield services firm Baker Hughes Co. Maintain production cheaply.

Shaya Hosseinzadeh, managing partner at OnyxPoint Global Management LP, said if shale oil companies do not add more rigs, US oil production could decline by the end of the year. The investment firm estimates that 450 rigs are needed to maintain current oil production levels, and 575 rigs are needed to bring it back to pre-Covid-19 levels. Mr. Hosseinzadeh said the problem for hydraulic fracturing companies is that they can’t access cheap capital anymore.

Share your thoughts

What do you think of the post-pandemic view of hydraulic fracturing? Join the conversation below.

“Fossil fuel FOSL -0.08% would need to produce a disproportionately higher rate of return to compete for capital with other sectors of the economy,” he said.

While shale oil companies are showing restraint for now, some analysts have predicted that they may increase spending and production if prices rise further.

At the height of the shale oil boom, publicly traded oil producers reinvested more than 100% of the cash flow they generated from operations back into drilling campaigns. Now they use about half of the income they generate from new drilling and only slightly increase production, if any.

Devon CEO Richard Mincrief said in an interview that the Oklahoma-based drilling company will reinvest about 45% of its operating cash flow, down from about 60% a few months ago as oil prices soar. That discipline has attracted some investors who haven’t traditionally invested in energy for Devon — seeking energy exposure as prices rise, and attracting it through Devon’s shifting distributions, he said.

“Some of them are names that our investor relations holders were not familiar with, but they manage a significant amount of money,” said Mr.

Shale companies had about $148.6 billion in debt coming in this year, according to energy consultancy Wood Mackenzie, and much of the money they raise goes toward accumulating debt. It is becoming increasingly difficult for many to secure new capital.

Many large US banks have cut their energy lending, and some European banks such as Deutsche Bank AG and Société Générale SA SCGLY – 3.25% have completely exited from fossil fuel financing. Loans backed by companies’ oil and gas reserves, the lifeblood of the youngest drillers, have shrunk, causing drillers to explore more expensive financing.

Laredo Petroleum Inc. and LPI -6.68% Centennial Resource Development Inc. and Callon Petroleum Co. during the pandemic. Lenders have not increased their borrowing rules this year, despite higher energy prices.

Callon said it will cut its 2021 capital expenditures to $430 million, which is a 12% decrease from its 2020 budget. In 2019, it spent $515 million. As a result, the company said it will produce about 90,000 barrels of oil and gas per day in 2021, down from more than 101,000 barrels per day in 2020. Kallon said it is focusing on reducing its debt of about $3 billion. The company refused to comment.

With US oil prices soaring more than 50% this year to above $70 a barrel, shares of shale oil companies have also risen. The market value of the 25 largest oil producers in the independent United States has nearly doubled this year to about $360 billion, according to data from S&P Global Market Intelligence. By comparison, the S&P 500 is up about 17% this year.

However, with a few exceptions, energy stocks have basically only recovered to where they were before the pandemic. Energy stocks are trading at half the price to book ratio they averaged from 1928 through 2009, before shale drilling became mainstream, according to Empirical Research Partners LLC.

“Public equity investors are tired of oil price volatility. They want cash now, whether from buybacks or regular or private dividends,” said Todd Dittmann, head of energy at hedge fund Angelo Gordon & Co.

Hydraulic fracturing is regularly subject to scrutiny, but it is an integral part of the cyclical nature of energy markets. Heard on the Street’s Jinjoo Lee explains how it all works. Photo: David McNew/Getty Images

Write to Colin Eaton at [email protected] and Christopher M. Matthews at [email protected]

Copyright © 2020 Dow Jones & Company, Inc. all rights are save. 87990cbe856818d5eddac44c7b1cdeb8

.

[ad_2]