US shale production—the chief source of rapid growth that made the US the world’s largest oil producer—is slowing down fast, according to a recent report from IHS Markit.
The new IHS Markit outlook for oil market fundamentals for 2019-21 expects total US production growth to be 440,000 b/d in 2020 before essentially flattening out in 2021. Modest growth is expected to resume in 2022. But those volumes would still be in stark contrast to the boom levels of recent years, said Raoul LeBlanc, vice-president for North American unconventional, IHS Markit.
“Going from nearly 2 million b/d annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” said LeBlanc. “This is a dramatic shift after several years where annual growth of more than 1 million b/d was the norm.”
The key challenge for producers now is to meet investors’ new focus on return of capital. This comes at a time when companies are facing a prolonged period of lower prices and when access to financing from capital markets has become difficult, the report says.
Exploration and production companies are trading at multiples that are half to one third of what they were in 2017, and debt markets are unwilling to provide fresh debt for all but the largest shale players.
“The combination of closed capital markets and weak prices are pulling cash out of the system,” LeBlanc says. “Investors are imposing capital discipline on E&P’s by pushing down equity prices and pushing up the cost of capital on debt markets.”
These financial trends will impact operations in turn. With West Texas Intermediate prices expected, at this point, to average around $50/bbl in 2020 and 2021, IHS Markit forecasts capital spending for onshore drilling and completions to fall by 10% to $102 billion this year, another 12% to $90 billion in 2020, and another 8% to $83 billion in 2021—a nearly $20-billion decline in annual spending over just 3 years.
“It all represents the strongest headwinds for shale producers since the oil price collapse in 2015,” LeBlanc says.
Aggravating the situation is that some options for weathering the storm that worked then will not be available this time, the report said.
“Operators were able to outperform the price collapse in 2015-16 because they were able to vastly outspend cash flow thanks to accommodative debt and equity markets, while at the same time achieving huge leaps in well productivity and capital efficiency,” LeBlanc said. “This time around, capital markets are skeptical and wary, and the scope for further productivity gains is limited.”
Nevertheless, the industry retains the ability to still grow rapidly under the right conditions, the report said. IHS Markit’s analysis shows that a $65/bbl oil price would provide the ability to post strong volume growth while also providing meaningful returns to shareholders. The crucial tipping point for this new shale era appears to be oil prices somewhere near the mid-$50s—the point where it remains viable to have both some production growth and deliver shareholder returns, the report says.
“There is certainly ample inventory of high-quality wells out there,” LeBlanc said. “Shale producers are making a deliberate change to the business model in response to investor demands. The question becomes, what are the new conditions for growth? The answer is that now the trajectory of production depends almost entirely on the oil price.”
