The last barrel

I am pleasantly surprised that our industry leaders continue to act responsibly and are not repeating the painful mistakes of the past by ramping-up drilling activity to capitalize on higher oil prices. In fact, reinvestment rates among U.S. shale oil producers hit an all-time low in third-quarter 2021, resulting in a record free cash flow for the quarter, and are projected to fall even lower by year-end (Rystad Energy).

The analysis focused on a peer group of 21 public U.S. shale oil producers, excluding majors, that together account for 40% of the expected 2021 output. The group’s combined reinvestment rate in the third quarter of 2021 was 46%, down from 53% over the same period in 2020 and significantly lower than the historical average of approximately 130%. The reinvestment rate is calculated by comparing shale producers’ oil and gas capex against their cash flow from operations (CFO). The CFO of the last quarter was the strongest since second-quarter 2019.

The analysis shows $7 billion in underspending by shale producers during third-quarter 2021, comparing oil and gas capex with CFO. Operators managed to slightly increase peer-group quarterly capex in this year’s third quarter to $5.9 billion, up from $5.3 billion in the previous quarter, while further increasing CFO to $12.8 billion. All but one operator balanced spending in the third quarter of this year, reaching a new level of industry-wide cash balancing.

Such a low reinvestment rate stands out for shale industry observers, especially as the peer group reported a record-breaking free cash flow and earnings before interest, tax, depreciation and amortization of $6 billion and $16 billion, respectively. But it’s not the end of the reinvestment slide.

Further reductions expected. Projections show that reinvestment will fall further to 40% in fourth-quarter 2021. Also, for the first time since late 2018, the group’s combined net debt dropped below the eight-year average floor of $52 billion, coming in at $51 billion for the third quarter.

Third-quarter results show several large independent operators ramped up spending in line with another financially robust quarter, in part due to the strong recovery in WTI crude prices. Operators, as expected, started to communicate 7% to 15% cost inflation, with much of the impact anticipated to come in early 2022. However, this is expected to be absorbed by improved well productivity and capital efficiencies in most cases.

Investors reap reward. Dividend payments increased 70% for the peer group in this year’s third quarter versus the second quarter. In comparison, the actual dividend-to-capex ratio increased to 26%, compared to 17% in the preceding quarter. Further capital spending control by the industry was aimed at deleveraging and garnering stable shareholder support. Stock buybacks have predominantly been paused, as the market recovered naturally with the WTI price increase.

Eagle Ford needs more investment. Crude and natural gas production in the Eagle Ford play dropped 35% and 20%, respectively, in May 2020, due to Covid-19, according to GlobalData. However, the company notes that despite a recent sustained upswing in WTI prices, production of crude and natural gas is failing to show signs of a major increase. To reverse the trend, it is estimated that an additional $1.5 billion of investment is required to increase production 10% by the end of next year.

Eagle Ford production has been stable at 1,070 Mbopd and 5,850 MMcfd for natural gas since June last year. “As WTI futures prices climbed 38% in the first half of 2021, and reached $72/bbl in July, there has been an increase in drilling activity in the Eagle Ford, where rig count rose 27%. However, we are yet to see an increase in production, as newly drilled wells need to be completed and put on production, says Svetlana Doh. The speed at which rigs are added slowed at around 3% in the past six months, which suggests that production is not likely to rebound to pre-pandemic levels of 1,400 Mbopd in the next two years, unless Eagle Ford operators chose a more aggressive drilling strategy.”

Similar to other basins, the Eagle Ford also saw an increase in M&A activity, as operators attempted to consolidate their focus on core positions. For example, SilverBow Resources has its primary position in the Eagle Ford shale and is currently in the process of completing its third acquisition deal within the play. The series of deals is aimed at strengthening the company’s position in the play by having a larger number of high return locations, as well as giving the operator more flexibility in building its future development strategy.

Uptick forecast for 2022. U.S. shale expenditure is projected to surge 19.4% next year, increasing from an expected $69.8 billion in 2021 to $83.4 billion, the highest level since the onset of Covid-19 and signaling the industry’s emergence from a prolonged period of uncertainty and volatility (Rystad).

As the impact of the pandemic on demand and activity levels out, U.S. land players are poised to increase spending. However, as the Omicron variant tightens travel restrictions and raises concerns over a potential industry slowdown, some hesitancy in spending could yet materialize. Of the expected year-on-year increase, service price inflation, alone, is set to add $9.2 billion, with increased activity chipping in $8.6 billion. These increases will be offset partially by $4.2 billion in savings from efficiency gains driven predominantly by further adoption of simul-fracs.

“Oil and gas activity and upstream spending in U.S. land has been exposed to significant volatility in the last two years. Aggressive strategies from private operators in the U.S. shale patch have driven spending this year, but we anticipate significant growth in 2022 from public and private operators alike,” concluded Artem Abramov, head of shale research at Rystad Energy.

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com