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U.S. Shale Production to Keep Falling: Permian Leads the Way
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Following a decade-long surge in shale drilling, oil production from the top U.S. plays is now heading in opposite direction.
While the shale revolution greatly improved U.S. energy independence, it also ushered in a flood of domestic supply that did not look to subside anytime soon. The breakneck production growth continued to put pressure on prices to an extent where a 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, is forced to go into negative growth amid unsustainable oil prices. The WTI benchmark may have more than doubled from their April lows, but oil below $35 is still unprofitable for most companies.
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 (CHK - Free Report) were already struggling to turn a profit even before the coronavirus struck. At the prevailing crude prices of around $34 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 towards 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 June, from 8 million barrels per day (MMbbl/d) in May to 7.8 MMbbl/d – levels last seen during late 2018. A closer look at America’s seven most significant shale basins would reflect that June would be the second month in a row that oil production will shrink.
Permian Leads the Way
In particular, output from United States’ number one basin – Permian - is set to fall by 87,000 bbl/d month over month to 4.3 MMbbl/d in June – the second month of decline. Compared to June 2019, the Permian Basin’s production would be essentially flat.
Oil production in this unconventional play continued to set records and reached an all-time high of around 4.8 MMbbl/d in April, according to data from the Department of Energy. In fact, output from the Permian Basin, covering parts of western Texas and southeastern New Mexico, currently makes up more than a third of the total U.S. crude oil production. It is primarily because of the Permian shale that the United States has turned into the world's biggest oil producer, ahead of Russia and Saudi Arabia.
However, the record-setting production has since given way to a declining profile caused by the steep decline in oil prices. Permian-based energy producers like Diamondback Energy (FANG - Free Report) , Cimarex Energy, EOG Resources (EOG - Free Report) , Parsley Energy, Concho Resources and Pioneer Natural Resources (PXD - Free Report) are all going to invest a lot less money into the Permian in 2020 in the face of low prices.
Even supermajors ExxonMobil (XOM - Free Report) and Chevron (CVX - Free Report) - both carrying a Zacks Rank #2 (Buy) - are slashing production in the Permian Basin. As a proof of the moderation in activity, the rig count continues to decline, with oil rigs dipping to 162 last week, down from around 450 a year ago, according to Baker Hughes.
The next most prolific formations – Bakken, Eagle Ford and Niobrara - are also set for a decline in June, of 21 Mbbl/d, 36 Mbbl/d and 24 Mbbl/d, respectively.
In a nutshell, the decelerating field work over the past few months is leading to significant pullback in crude oil production in the U.S. shale basins.
Conclusion
The cutbacks in drilling activity and the production slowdown do not look to abate anytime soon unless there is a sustained increase in oil prices, whose chances look slim given the red flags surrounding the economy and the coronavirus-induced demand destruction for the fuel.
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U.S. Shale Production to Keep Falling: Permian Leads the Way
Following a decade-long surge in shale drilling, oil production from the top U.S. plays is now heading in opposite direction.
While the shale revolution greatly improved U.S. energy independence, it also ushered in a flood of domestic supply that did not look to subside anytime soon. The breakneck production growth continued to put pressure on prices to an extent where a 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, is forced to go into negative growth amid unsustainable oil prices. The WTI benchmark may have more than doubled from their April lows, but oil below $35 is still unprofitable for most companies.
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 (CHK - Free Report) were already struggling to turn a profit even before the coronavirus struck. At the prevailing crude prices of around $34 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 towards 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 June, from 8 million barrels per day (MMbbl/d) in May to 7.8 MMbbl/d – levels last seen during late 2018. A closer look at America’s seven most significant shale basins would reflect that June would be the second month in a row that oil production will shrink.
Permian Leads the Way
In particular, output from United States’ number one basin – Permian - is set to fall by 87,000 bbl/d month over month to 4.3 MMbbl/d in June – the second month of decline. Compared to June 2019, the Permian Basin’s production would be essentially flat.
Oil production in this unconventional play continued to set records and reached an all-time high of around 4.8 MMbbl/d in April, according to data from the Department of Energy. In fact, output from the Permian Basin, covering parts of western Texas and southeastern New Mexico, currently makes up more than a third of the total U.S. crude oil production. It is primarily because of the Permian shale that the United States has turned into the world's biggest oil producer, ahead of Russia and Saudi Arabia.
However, the record-setting production has since given way to a declining profile caused by the steep decline in oil prices. Permian-based energy producers like Diamondback Energy (FANG - Free Report) , Cimarex Energy, EOG Resources (EOG - Free Report) , Parsley Energy, Concho Resources and Pioneer Natural Resources (PXD - Free Report) are all going to invest a lot less money into the Permian in 2020 in the face of low prices.
Even supermajors ExxonMobil (XOM - Free Report) and Chevron (CVX - Free Report) - both carrying a Zacks Rank #2 (Buy) - are slashing production in the Permian Basin. As a proof of the moderation in activity, the rig count continues to decline, with oil rigs dipping to 162 last week, down from around 450 a year ago, according to Baker Hughes.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The next most prolific formations – Bakken, Eagle Ford and Niobrara - are also set for a decline in June, of 21 Mbbl/d, 36 Mbbl/d and 24 Mbbl/d, respectively.
In a nutshell, the decelerating field work over the past few months is leading to significant pullback in crude oil production in the U.S. shale basins.
Conclusion
The cutbacks in drilling activity and the production slowdown do not look to abate anytime soon unless there is a sustained increase in oil prices, whose chances look slim given the red flags surrounding the economy and the coronavirus-induced demand destruction for the fuel.
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 8 stocks to watch. The report is only available for a limited time.
See 8 breakthrough stocks now>>