Resilient U.S. Shale Firms Ready to Pump More Oil

  • Date: 28/09/16
  • Lynn Cook and Bradley Olson, The Wall Street Journal

When oil prices began to plunge two years ago due to a global glut of crude, experts predicted U.S. shale producers would be the losers of the resulting shakeout. But the American companies that revolutionized the oil and gas business with hydraulic fracturing and horizontal drilling are surviving the carnage largely unbowed.


Though the collapse in prices caused a wave of bankruptcies, total U.S. oil production has only fallen by about 535,000 barrels a day so far this year compared with 2015, when it averaged 9.4 million barrels, according to the latest federal data.

As the oil markets ponder where production will resume when prices pick back up, one clear answer has emerged: America. Goldman Sachs forecasts the U.S. will be pumping an additional 600,000 to 700,000 barrels of oil a day by the end of next year—making up for every drop lost in the bust.

Few predicted that in the fall of 2014, when Saudi Arabia signaled that it wouldn’t curb its output to put a floor under crude prices. Oil pundits concluded that a brutal culling would force higher-cost players known as marginal producers—a group that includes shale drillers—out of the market.

But the greatest consequence of the Saudi decision and subsequent price drop is that it has delayed costly oil megaprojects, from deep-water platforms off Angola to oil-sands mines in Canada.

Even if members of the Organization of the Petroleum Exporting Countries, which are meeting this week in Algiers, manage to strike a deal to cut oil production later this year, U.S. producers will step into that void.

“The U.S. isn’t the marginal barrel but the most flexible,” said R.T. Dukes, an analyst at Wood Mackenzie. “We’ll be the fastest to snap back.”

More than 100 North American energy producers have declared bankruptcy during this downturn, but even companies working through chapter 11 keep pumping oil and gas. Many exit bankruptcy stronger thanks to a balance sheet that has been wiped clean. SandRidge Energy Inc., which filed in May, will exit next month after erasing nearly $3.7 billion in debt.

Many shale operators are still struggling at current prices, drilling at a loss and tapping Wall Street for new infusions of cash. But the strongest producers, including EOG Resources Inc. and Continental Resources Inc., soon will be able to generate enough money to pay for new investments and dividends—as well as boost production—even at low prices, analysts say.

U.S. production began inching up in July, shortly after oil prices rebounded to $50-a-barrel territory. Producers quickly put 100 rigs back to work this summer.

The ramp-up spooked the market, sending oil prices plunging 20% back toward $40. They have recently rebounded to about $45.

The gyrations will continue for months as shale producers go back to work, said Eric Lee, an analyst at Citibank, who predicts crude will stabilize around $60 a barrel in late 2017.

Though oil storage tanks around the world are brimming, new sources will be needed soon because older oil fields decline by 5% a year and global demand continues to rise 1.2% a year. Demand will break through the 100 million barrel-a-day mark by 2020, according to the International Energy Agency.

The looming gap between supply and demand is one reason the easy money that fueled the American drilling boom hasn’t dried up, said Lewis Hart, senior vice president of corporate advisory and banking for Brown Brothers Harriman in New York.

Even as banks and other traditional lenders tighten their purse strings, alternative sources of money are cropping up, from private-equity funds to distressed-debt specialists.

“The very existence of that capital means prices are likely to be lower for longer, because it compounds the supply problem,” Mr. Hart said.

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