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Are There Signs of Green Shoots in U.S. Shale Oil Production?
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The shale revolution greatly improved U.S. energy independence. But it also ushered in a flood of domestic supply that is unlikely to subside anytime soon. The breakneck production growth continued to put pressure on prices to an extent where the majority of oil plays worked on razor thin margins. There was always a concern that the frenzied activity out of the shale region was economically unsustainable in the long term given the massive capital burn, depressed returns and huge debts.
Shale’s Economic Viability Breaks Down
Then came the coronavirus pandemic, the subsequent hit to global oil demand and with it, collapse of prices. With WTI crude futures falling below $30, $20, $10 and even going negative for a while, U.S. shale oil producers started feeling the heat. Even the Permian, where production had been on a tear until recently, was forced to go into negative growth amid unsustainable oil prices. The WTI benchmark may have more than doubled from their April lows, but oil at $40 is still unprofitable for most companies, especially the ones with huge debt burdens.
Oil between $45 and $50 a barrel is considered the break-even point for most shale operators, which means that they need crude prices of at least $45 to balance their operating cash flows with capital expenditure. Some shale companies such as Whiting Petroleum , and Chesapeake Energy were already struggling to turn profitable even before the coronavirus struck and have since filed for bankruptcy. At the prevailing crude prices of around $42.50 per barrel, a lot more firms are unlikely to hit cash flow breakeven.
Players Dial Back Production
As a response to the bearish environment, the shale fraternity — especially the ones whose production mix is heavily tilted toward crude — has scaled back drilling activity and cut their capital budgets significantly.
Per the latest edition of the EIA’s Drilling Productivity Report, crude output in these prolific shale plays is expected to decrease in September, from 7,577 thousand barrels per day (Mbbl/d) in August to 7,558 Mbbl/d — levels last seen during 2018. A closer look at America’s seven most significant shale basins would reflect that September would be the fifth month in a row that oil production will shrink.
But Permian Output Shows Signs of Revival
The Eagle Ford is set to lose 14 Mbbl/d between July and August, the most across all major shale basins, as the likes of Marathon Oil (MRO - Free Report) have slashed capital spending. Most other formations are also set to decline in September.
However, production in two of America’s biggest oil fields — Permian Basin in the western part of Texas and the south-eastern part of New Mexico, and Bakken in North Dakota — is making a comeback after months of bust.
In particular, output from United States’ number one basin — Permian — is expected to rise by 7 Mbbl/d month over month to 4,154 Mbbl/d in September, indicating the first increase in five months. With oil prices having rebounded from the coronavirus-induced lows in late April to more than $40 per barrel now, the likes of Parsley Energy and Pioneer Natural Resources (PXD - Free Report) have brought some previously shut-in production back online.
In the Bakken region too, output is expected to edge higher by 7 Mbbl/d to 1,191 Mbbl/d in September with the Zacks Rank #3 (Hold) Continental Resources restoring curtailed volumes.
In a nutshell, the decelerating field work over the past few months is leading to significant pullback in crude oil output in the U.S. shale basins. At the same time, stronger oil prices are prompting more companies to reactivate their coronavirus-hampered production.
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Are There Signs of Green Shoots in U.S. Shale Oil Production?
The shale revolution greatly improved U.S. energy independence. But it also ushered in a flood of domestic supply that is unlikely to subside anytime soon. The breakneck production growth continued to put pressure on prices to an extent where the majority of oil plays worked on razor thin margins. There was always a concern that the frenzied activity out of the shale region was economically unsustainable in the long term given the massive capital burn, depressed returns and huge debts.
Shale’s Economic Viability Breaks Down
Then came the coronavirus pandemic, the subsequent hit to global oil demand and with it, collapse of prices. With WTI crude futures falling below $30, $20, $10 and even going negative for a while, U.S. shale oil producers started feeling the heat. Even the Permian, where production had been on a tear until recently, was forced to go into negative growth amid unsustainable oil prices. The WTI benchmark may have more than doubled from their April lows, but oil at $40 is still unprofitable for most companies, especially the ones with huge debt burdens.
Oil between $45 and $50 a barrel is considered the break-even point for most shale operators, which means that they need crude prices of at least $45 to balance their operating cash flows with capital expenditure. Some shale companies such as Whiting Petroleum , and Chesapeake Energy were already struggling to turn profitable even before the coronavirus struck and have since filed for bankruptcy. At the prevailing crude prices of around $42.50 per barrel, a lot more firms are unlikely to hit cash flow breakeven.
Players Dial Back Production
As a response to the bearish environment, the shale fraternity — especially the ones whose production mix is heavily tilted toward crude — has scaled back drilling activity and cut their capital budgets significantly.
Per the latest edition of the EIA’s Drilling Productivity Report, crude output in these prolific shale plays is expected to decrease in September, from 7,577 thousand barrels per day (Mbbl/d) in August to 7,558 Mbbl/d — levels last seen during 2018. A closer look at America’s seven most significant shale basins would reflect that September would be the fifth month in a row that oil production will shrink.
But Permian Output Shows Signs of Revival
The Eagle Ford is set to lose 14 Mbbl/d between July and August, the most across all major shale basins, as the likes of Marathon Oil (MRO - Free Report) have slashed capital spending. Most other formations are also set to decline in September.
However, production in two of America’s biggest oil fields — Permian Basin in the western part of Texas and the south-eastern part of New Mexico, and Bakken in North Dakota — is making a comeback after months of bust.
In particular, output from United States’ number one basin — Permian — is expected to rise by 7 Mbbl/d month over month to 4,154 Mbbl/d in September, indicating the first increase in five months. With oil prices having rebounded from the coronavirus-induced lows in late April to more than $40 per barrel now, the likes of Parsley Energy and Pioneer Natural Resources (PXD - Free Report) have brought some previously shut-in production back online.
In the Bakken region too, output is expected to edge higher by 7 Mbbl/d to 1,191 Mbbl/d in September with the Zacks Rank #3 (Hold) Continental Resources restoring curtailed volumes.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Conclusion
In a nutshell, the decelerating field work over the past few months is leading to significant pullback in crude oil output in the U.S. shale basins. At the same time, stronger oil prices are prompting more companies to reactivate their coronavirus-hampered production.
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
See these 7 breakthrough stocks now>>