About two years ago, OPEC+ made a high-stakes wager that it could curb oil production and drive crude prices higher without unleashing an onslaught of supply from U.S. shale producers. Indeed, Saudi Arabia was adamant that the golden age of U.S. shale was over as plunging oil prices put hundreds of companies out of business. Well, the alliance's gambit has definitely paid off, with oil prices staging a strong rebound and WTI crossing the $80/barrel mark for the first time in seven years.
Meanwhile, whereas gloomy predictions about the death of U.S. shale appear to have been overdone, shale drillers have dramatically cut production and mostly stuck to their pledge to cut costs, return money to shareholders in dividends and share buybacks, and pay down debt.
And their neighbors to the north have similarly stuck to the same playbook despite being awash with cash.
After years in the doghouse, Canada's struggling oil patch is enjoying a rare oil boom, with oil and gas revenues expected to reach record levels in the current year if prices remain elevated.
Typically, during past oil booms after a downturn, Canada's OilPatch went through a predictable pattern of new startups setting up shop—soaring land prices and companies cranking up production. But things are playing out differently during the current boom cycle despite resurgent oil demand and oil prices at multi-year highs.
"I've never seen this kind of response to demand increases before--ever," Tamarack Valley Energy (OTCPK: TNEYF) CEO Brian Schmidt has told the Canadian Broadcasting Corporation (CBC).
Canada's energy benchmark, Horizons S&P/TSX Capped Energy ETF (HXE.TO), is up a roaring 97.8% over the past 12 months, more than double the return by its American brethren and more than 5x higher the S&P/TSX Composite Index return.
North American producers are facing a real dilemma. This is not only because they have pledged lower drilling activity in favor of returning much of their excess cash flows to shareholders in dividends and buybacks, but also because oil demand is surging.
A recent report by BMO Capital Markets released this month says that global oil demand "will continue to grow for the foreseeable future and soon achieve record highs."
The report says demand could increase by 4.6 million barrels per day this year, ultimately topping 100 million barrels per day. That's quite a jump considering that OPEC+ is struggling to meet its quotas. According to an October report, just a handful of OPEC members are capable of meeting higher production quotas compared to their current clips. Amrita Sen of Energy Aspects told Reuters that only Saudi Arabia, the United Arab Emirates, Kuwait, Iraq, and Azerbaijan are in a position to boost their production to meet set OPEC quotas, while the other eight members are likely to struggle due to sharp declines in production and years of underinvestment.
BMO's report says the North American oil and gas sector is enjoying its strongest financial position in years. Still, the excess cash will largely be distributed to shareholders instead of going to drilling new wells.
Canadian Natural Resources, Suncor Energy (NYSE: SU), Cenovus Energy (NYSE: CVE), and Imperial Oil (NYSE: IMO) have all raised their capital spending and oil production expectations for this year. However, a big difference this time around compared to past years is that the companies are opting to spend on dividends, share buybacks, and squeezing more barrels out of existing assets instead of taking on new, large expansion projects.
In the United States, Permian output has started growing again thanks to a high rate of completions from existing wells, though it has led to a huge reduction in the number of drilled-but-uncompleted wells (DUCs). According to the Energy Information Administration (EIA), Permian DUCs peaked in July 2020 at 3,705, but had fallen to a four-year low of 1,869 in September 2021. The Permian DUC inventory fell by 125 in September, slightly below the YTD average of 136 per month. The run-down in DUCs has allowed the number of completions per month to rise above 400, resulting in strong month-over-month production growth, while new wells drilled per month have remained below 300. The Permian is by far the most dominant driver of U.S. shale output increases.
Obviously, this trend cannot carry on indefinitely, and shale producers will have to ramp up drilling of new wells sooner or later.
Industry leaders Exxon (NYSE: XOM), Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP) have already provided year-ahead capital and production guidance -- which, across-the-board, focus on controlling spending and returning cash to shareholders. Meanwhile, leading shale producers Pioneer Natural Resources (NYSE: PXD), Devon Energy (NYSE: DVN), and Diamondback Energy (NASDAQ: FANG) have announced plans to stick to earlier pledges of lower capex, slower production growth, and higher shareholder returns.
One big exception to this trend is EOG Resources (NYSE: EOG).
The Houston, Texas-based shale producer has announced plans to break with the industry by ramping up oil production. Although EOG has caveated its comment, indicating production growth is dependent on the macroeconomic environment, it makes one wonder what EOG knows about the commodity markets that its peers are missing.
EOG shares are doing well even after the announcement, having climbed 16.5% in the year-to-date compared to a 14.8% gain by the Energy Select Sector SPDR ETF (NYSEARCA: XLE).
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. More