MARKET ANALYSIS US SHALE
CRUNCH TIME US shale drillers keep their powder dry for now, but it remains unclear how they’ll respond in 2022 as the declines in drilled but uncompleted wells (DUCs) and inventories come to bear, says Johannes Van Der Tuin
INCREASING GLOBAL oil demand has started to revive US hydrocarbon production, but any recovery is nascent at best and – as with other areas of the global economy – the pandemic accelerated trends within the US shale patch that had already been at work prior to 2020. As the latest round of US earnings calls highlighted, management teams and investors remain focussed squarely on free cash flow. ‘Capital stewardship’ had already become the watchwords for US exploration and production (E&P) executives before COVID-19 and remains so today. Additionally, environmental, social and governance (ESG) pressures continue to ramp-up from investors and are likely to stick around for the foreseeable future, particularly given the change of administrations in Washington. As a result, after the last year and a half of market tumult, management teams are understandably gun shy about forward-looking capital expenditures and aggressively raising production, instead preferring to live off their dwindling drilled but uncomplicated wells (DUC) inventories, pay down debt, and focussing on returning cash to shareholders.
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Given the current rate of completions, however, the test will come as we move into 2022, when corporates are likely to have exhausted their inventory of DUCs. Management teams will then need to decide whether to increase capex proactively or wait to see if lower production results in higher oil prices and more organic cashflow – some of which could then be reinvested into the basins. A NASCENT RECOVERY US Energy Information Agency (EIA) data show that crude and condensate
After the last year and a half of market tumult, management teams are understandably gun shy about forward-looking capital expenditures and aggressively raising production
production have yet to really turn the corner in every major US shale oil basin except for the Permian. Liquid hydrocarbon supply remains more or less depressed in the Niobrara and Williston, but West Texas oil output is already back up to around 4.8 million bpd according to the latest US government projections. Even in the Midland region though, rig activity remains sedate and growth is being driven more by completions, with the number of active fracking crews above 120 for the first time since the start of the pandemic. Perhaps unsurprisingly given their track record of overproduction, private companies in the Permian are the only E&P segment that has been raising its Permian rig count substantially, with now over 200 active rigs in basin. The side effect has been lower aggregate average well productivity, given that privates tend to have weaker type curves, bringing down overall basin performance – a trend that is likely to continue over the short-term. Management teams for the publicly traded international oil companies
