The rise in oil prices this year raises all-too-familiar demand for the oil market and the OPEC + group: Will the US shale come back sooner than expected, wrecking the alliance’s efforts to manage supply?
Most publicly traded US shale companies continue to promise strict capital discipline. They promise that any excess cash flow will go towards additional payouts to shareholders, who have seen years of meager returns while the shale patch was on the hunt for drilling and production records.
However, there is a group of shale producers who could again spoil OPEC + oil market management plans and produce more than the market and forecasters currently expect.
This is the group of the smaller private oil companies that benefit from higher oil prices, as their primary way of generating cash is higher production. Those closely-held producers also benefit from not being penalized by the stock market or investors for choosing to ramp up drilling activity, while large listed companies are scaling back capital expenditures and rigs idling.
There are signs that some private shale operators who have ramped up production in the past year will continue to do so in the coming months.
More than expected US production entering the market could derail current forecasts for US oil supplies and the OPEC + alliance’s efforts to control much of the global oil supply as demand recovers from the pandemic shock.
For example, privately-owned DoublePoint Energy plans to increase production to more than 100,000 barrels per day (bpd) in the coming months, after doubling production to 80,000 bpd in the past year.
“The public is under a lot of pressure to be disciplined with the capital they spend,” Cody Campbell, DoublePoint Energy co-chief executive, told Bloomberg in a recent interview.
“They don’t have the freedom to go after wins as we can,” Campbell added. Related: Is This The World’s Next Major Offshore Oil Region?
If more of the ‘smaller guys’ decide to take advantage of higher oil prices and boost production to generate more returns, they could raise expectations of the amount of oil the US would pump this year.
Currently OPEC itself expects US crude oil production to be 11.2 million barrels per day by 2021, slightly below an estimated production of 11.28 million barrels per day for 2020. In its latest Monthly Oil Market Report (MOMR) ) for February, the cartel has passed its 2021 forecast for US oil production at 210,000 bps and now expects an annual decline of 70,000 bps from 2020 as continued investment discipline “is expected to weigh on production prospects in 2021.”
Larger publicly traded US producers are concerned that some drilling companies might break promises to limit production.
‘There will be bad actors [who pursue] growth for the sake of growth, ”Matthew Gallagher, an executive at Pioneer Natural Resources, told the Financial Times in January.
Pioneer Natural Resources will seek to limit long-term production growth to an average of 5 percent, CEO Scott Sheffield said during the Q4 earnings call last week. In addition, Pioneer expects to return up to 75 percent of its annual free cash flow to shareholders after the base dividend is paid, Sheffield said. This will be paid back in the form of variable dividends paid quarterly the following year, the executive said. Related: Is This The World’s Next Major Offshore Oil Region?
While Pioneer and other major publicly traded shale players appear to be heeding investors’ calls for higher returns for shareholders, the smaller, closely-held operators promise nothing but to pursue higher returns on their investment generated by increased oil production.
U.S. shale production as a whole is unlikely to return to pre-pandemic levels, Occidental’s CEO Vicki Hollub said at IHS Markit’s CERA Week on Tuesday.
“The severe decline in activity in the US, along with the high decline in shale and pressure from the investment community to maintain discipline rather than grow, means, in my opinion, that shale will not return to where it was in the US” Hollub said. , as worn by Reuters.
Shale production may never return to pre-COVID levels, but private drilling companies could surprise for the upward big forecasters, the oil market and even OPEC.
By Tsvetana Paraskova for Oilprice.com
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