Shale Now Cash Flow Neutral | Russell T. Rudy Energy LLC
Writing in “Oil Voice”, Nick Cunningham cites International Energy Agency (IEA) data which indicates that the U. S. shale industry was cash flow neutral for the first time in the third quarter of 2016. Given the magnitude of the shale revolution this sounds counterintuitive. However, the shale boom involved lots of debt, and rising revenues from high prices and increasing production levels were not enough to cover drilling costs. Even when domestic oil production peaked at 9.7 million barrels of oil per day (bopd) in the second quarter of 2015, shale operators had one of their worst quarters in terms of cash flow.
By mid-2015 the cash flow crisis became evident as the most indebted and high-cost operators went out of business. In the ensuing consolidation, exploration and production companies drastically cut costs. By 2016 the surviving producers were able to benefit from lower costs and prices that were back above $40 per barrel. Consequently, the shale industry is now cash flow neutral for the first time.
With prices currently above $50 due to OPEC production cuts, some of the stronger oil companies feel confident enough to pursue low-break even projects in the Permian Basin of West Texas and Southeast New Mexico and parts of North Dakota’s Bakken shale. Concho Resources, Murphy Oil, Devon Energy, Pioneer Resources and EOG Resources are already increasing capital spending.
Angus Rodger with consulting firm Wood Mackenzie, sees $55 as the sweet spot for oil prices, opining, “If we stay (at $55 a barrel), the world’s biggest oil companies start to make money again. If we go back down to $50 (or lower) in 2017…then those companies are in the negative territory and they go back into survival mode where they have been in the last two years.”
The industry still faces headwinds: a strengthening dollar, hedge fund speculation, OPEC cheating/exemptions, and surging domestic production all pose risks. A stronger dollar is a double whammy; it takes fewer dollars to buy a barrel and can also depress foreign economic growth, and consequently demand for oil.
Hedge funds are all bullish on oil for the time being. However, should this confidence erode and a sell-off occur, prices will plummet. OPEC cheating on production quotas is a clear and present danger. However, less obvious is the exemption from quotas granted to Libya and Nigeria. Libya is already showing signs of revival and hopes to increase production by 300,000 bopd in 2017. Finally, the Energy Information Administration reports that domestic shale producers have already increased output by 300,000 bopd.
In spite of the risks ahead, Cunningham feels that if prices can stay at current levels, the shale industry could become cash flow positive for the first time.
To read the article, which includes an excellent graph, in its entirety, please go to https://www.oilvoice.com/Opinion/928/US-Shale-Is-Now-Cash-Flow-Neutral .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
