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Shale Oil Firms Pick Budget Discipline Over Production Growth

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The shale revolution greatly improved U.S. energy independence. But it also ushered in a flood of domestic supply that looks unlikely to subside anytime soon.

Shale’s Unsustainable Business Model

The breakneck in production growth continued to put pressure on prices to an extent wherein 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.

Then came the coronavirus pandemic, the subsequent hit to global oil demand and with it, the collapse of prices. With WTI crude futures falling below $30, $20, $10 and even going below zero for a while, U.S. shale oil producers started feeling the heat.

A wave of bankruptcies followed as prices weren’t enough for them to survive the long term. Even the Permian, where production had been on a tear until recently, was forced to go into negative growth amid unsustainable oil realizations.

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. Consequently, for the major part of 2020, oil prices were too low for the beleaguered firms — especially the highly leveraged ones — to continue producing.

Some shale companies such as Whiting Petroleum (WLL - Free Report) and Oasis Petroleum (OAS - Free Report) were already struggling to make a profit before the coronavirus had struck and therefore had to go the Chapter 11 route to restructure their debt and come back with a viable capital structure.

Players Junk ‘Grow at Any Cost’ Theory Post COVID

Although the WTI benchmark has come a long way since the depths of minus $38 a barrel in April, most companies are in no hurry to boost output. Finally, learning their lesson, the shale operators are primarily focusing on improving cost and increasing free cash flow rather than looking at higher production. While oil at $65 is profitable for almost all shale entities, the industry, for its part, is sticking to the mantra of capital discipline and sustainable production.

Per the latest edition of the EIA’s Drilling Productivity Report, crude output in these prolific shale plays is expected to decrease from 7,504 thousand barrels per day (Mbbl/d) in March to 7,458 Mbbl/d in April.

Among the top fields, the Eagle Ford and Bakken are may lose 15 Mbbl/d and 12 Mbbl/d, respectively, between March and April, the maximum across all major shale basins, as the likes of Marathon Oil (MRO - Free Report) and Hess Corporation (HES - Free Report) stress on capital efficiency. Most other formations are also set to decline in October.

But Permian Output Stages a Steady Recovery

Meanwhile, production in America’s biggest oil field — Permian Basin in the western part of Texas and the south-eastern part of New Mexico — continued its comeback. In particular, output from the United States’ number one basin is expected to rise by 11 Mbbl/d month over month to 4,281 Mbbl/d in April, indicating the second-straight monthly increase. With oil prices having rebounded from the coronavirus-induced lows in late April to the mid-$60s per barrel now, the likes of Matador Resources (MTDR - Free Report) and EOG Resources (EOG - Free Report) — both carrying a Zacks Rank #1 (Strong Buy) — are among the few that have announced plans to increase production.

You can see the complete list of today’s Zacks #1 Rank stocks here.

As a proof of the improvement in activity, the rig count in the Permian Basin has risen to 212 from a record low of 116 in August, according to Baker Hughes (BKR - Free Report) .


While the odd shale operators — chiefly in the Permian Basin — are looking to boost output, the bulk of the exploration and production companies are showing little sign of straying from their restrained drilling programs.

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