Shale drillers may be digging own hole as oil flirts with $40

Bloomberg

US shale is coming perilously close to puncturing its own rally. Just months after predicting double-digit production increases, largely based on crude prices sitting between $55 and $60 a barrel, drillers are suddenly contemplating the possibility of retrenchment as a stubborn global supply glut is keeping prices near $46.
It’s a reversal that could accomplish what OPEC and other global producers have failed to do this year: slow down America’s booming shale industry. Analysts and company officials say a drop to $40 a barrel could halt rig growth for smaller drillers in less active US shale basins, and undercut efforts by fracking service providers such as Halliburton Co., FTS International and Patterson-UTI Energy Inc. to raise their fees.
“The growth outlooks proposed by many oily E&Ps appear tenuous at best and not resilient to prolonged weak oil prices,” Mizuho Securities USA analysts Timothy Rezvan and James Lizzul wrote in a June 11 note. They cited rising service costs and the industry’s lack of hedging protection for next year.
Drillers at an RBC Capital Markets energy conference in New York last week insisted they were sticking with their spending plans, noting they’d emerged from last year’s oil-market slump with leaner costs and lower debt levels. But they acknowledged the shakier ground their budgets stand on.

‘TOGGLE ACTIVITY’
Noble Energy Inc. has the flexibility to “toggle activity” if prices decline further, Chief Financial Officer Ken Fisher said at the meeting, while EOG Resources Inc. Executive Vice-President Billy Helms said the company will “moderate” production if needed, according to summaries published by RBC analyst Scott Hanold. Messages seeking comment from EOG weren’t immediately returned. Reba Reid, a spokeswoman for Noble, confirmed the content of the RBC note.
The market got yet another bearish bump as West Texas Intermediate oil, the US benchmark, dipped below $46 a barrel on an industry report showing an unexpected boost for US crude stockpiles. Inventories rose by 2.75 million barrels last week, according to an American Petroleum Institute report, people familiar with the data said.
The US Energy Information Administration is due to report its highly watched tally of US stockpiles on Wednesday. A $45 barrel “slows most US shale plays,” UBS AG analysts led by William Featherston wrote in a June 9 note. At $40, companies will “hit the brakes” on growth even in the Permian, the prolific oil play in West Texas and New Mexico, the analysts predicted.
Oil has been mired below $50 a barrel by concerns that growing US supplies are overwhelming production cuts by the Organization of Petroleum Exporting Countries and its allies. The US oil rig count is at its highest level since April 2015. Last week, the US Energy Department forecast national crude production would hit a record 10 million barrels a day next year.
Shale shares have suffered along with oil prices. The Bloomberg Intelligence North America Independent E&Ps index, which tracks 56 mostly shale-focused drillers, has fallen 21 percent for the year even as the S&P 500 Index gained 9 percent.
Smaller oil companies in less active US shale basins would be the first to scale back at $40 a barrel, said James Williams, president at WTRG Economics, an Arkansas-based energy consultant. That includes closely held companies with less capital and anyone not among the top 15 or 20 US producers.
“The Permian keeps going,” Williams said, referring to the most active shale basin. “It doesn’t collapse, but I don’t think at $40 it grows.” Fracking service providers may be the hardest hit if explorers borrow a tactic from last year’s slump. The drillers could look to save money by doing the initial drilling but not the final frack jobs that complete wells, Williams said.
Oil and gas companies should consider cutting their growth forecasts now but probably won’t, said Mizuho’s Rezvan and Lizzul. With new drilling rigs in place, 2017 production is largely locked in, they wrote, though companies may discuss possible reductions to 2018 estimates when they report second-quarter earnings.