Oil price war puts squeeze on US shale companies
Market rout leaves most producers facing prices below production costs
Houston — For the last five years, US shale oil producers have been battling suppliers for lower costs, and running equipment and crews hard to drive drilling costs down by about $20 a barrel.
The oil market rout last week has left most shale companies facing prices below their costs of production. Opec and major oil producers including Russia have turned on each other to launch a price war that threatens to sink shale companies burdened with higher costs.
The cause of Opec and Russia’s disagreement was what to do about plummeting oil demand as coronavirus curbs travel and economic activity worldwide. When oil producers failed to agree on co-ordinated cuts, they abandoned all attempts to keep global markets balanced.
With US crude falling 50% this year to near $31 a barrel, only a handful of the hundreds of US shale companies can profit from their newest wells, according to a Reuters analysis of field-by-field data provided by consultancy Rystad Energy.
Shale producers, most of which budgeted $55-$65 per barrel oil in 2020, have moved quickly to idle rigs, cut staff and generate cash for expenses. The industry is on the ropes for the second time since 2014, when de facto Opec leader Saudi Arabia launched the last price war to drive shale producers out of the market.
That effort pushed many shale producers into bankruptcy but ultimately failed because the industry made quick technological advances that drove costs down.
Just 16 US shale companies operate in fields where the average new well costs are less than $35 per barrel, according to Rystad. Among those, Chevron, Devon Energy and EOG Resources said they plan or are weighing new spending cuts.
The largest US oil producer, ExxonMobil, turns a profit at $26.90 per barrel on its New Mexico properties, which are about a quarter of its Permian holdings, according to Rystad. The company declined to comment for this story, but said earlier in March it would slow its development in the Permian Basin, the largest US shale field that spans Texas and New Mexico.
Occidental Petroleum and privately held CrownQuest Operating both have costs below $30 per barrel, according to Rystad Energy.
But just covering output costs leaves producers lacking cash for shareholder dividends and corporate costs. Despite Occidental’s low-cost advantage, its shares traded on Friday at $14.26, down about 65% this year over worries it will not be able to shoulder its $40bn debt load.
In Oklahoma, Continental Resources can profit below $40 per barrel while EOG, Magnolia Oil & Gas and Murphy Oil can withstand the price onslaught in South Texas’ Eagle Ford shale play, according to Rystad.
In North Dakota only six producers can cover costs at that level. In the Permian, a dozen can.
The very few able to cover production costs will lead to a wholesale reduction in industry spending as unprofitable producers stop drilling, say analysts.
Already, producers are asking oil service companies, which supply them with what they need for drilling in the shale patch to cut the price they charge for those services by 25%.
Producers are already working with restructuring firms, hoping to cut deals with creditors, people familiar with the matter said, and others are checking the value of their hedges, a means of locking in prices for future output.
Redoubling cost cuts
“A limited amount of activity will be able to go on,” said Matt Gallagher, CEO of Parsley Energy, estimating that “activity levels will likely decrease 50% plus”.
Parsley last week led the charge of shale producers pressuring oilfield service companies for price cuts.
Most US shale production is “at risk with the current oil prices”, and new drilling projects are likely “to be put on hold relatively quickly”, said Artem Abramov, head of shale research at researcher Rystad Energy.
Parsley Energy is one of the few that can cover its costs with oil in the $30s, according to analysts’ estimates. But, said Gallagher, that is not good enough. “We fully expect that [cost] structure to reduce quickly from here,” he said.
Gallagher plans to cut spending and idle equipment, though the magnitude of the latest price collapse has not allowed him or others to precisely say how much and for how long. It will take six months for service costs to decrease, he said.
Competitors are still deciding how deeply they need to go. EOG Resources, one of the largest US shale producers, is “evaluating our activity” and “in the process of finalising our specific plans”, CEO Bill Thomas said.
Denver-based shale producer SM Energy has hedged 80% of 2020’s oil production, giving it a guaranteed price of about $55-$58 per barrel, and does not need to make quick cuts, said vice-president Jennifer Martin Samuels. Still, it is “evaluating the current plan in terms of modifying activity”.
“There are no good answers for the industry in a $30-per-barrel environment,” Stephen Richardson, a shale analyst at Evercore ISI, wrote on Thursday in a report titled: “Let’s not fool ourselves, it’s all uneconomic and likely to stay that way.”