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Record Profit Season Is Over For U.S. Shale

Record profits - that would be the best summary of the state of the global oil industry last year. From Big Oil majors to U.S. shale independents, everyone made money from the oil and gas price rally sparked by the war in Ukraine. But the party seems to be over, at least for shale drillers.

The Energy Information Administration said earlier this month it expected U.S. oil and gas production to hit a record next month. Oil output in the shale patch, the EIA said, would rise by 75,000 barrels daily, and the Permian would contribute 30,000 bpd of that, for a record total of 9.36 million barrels daily. Gas output would gain 400 million cu ft daily to a record 96.6 billion cu ft.

Yet meanwhile, Baker Hughes has reported that drilling rigs are on the decline, with the February rig count revealing the largest cut in activity since June 2020. The total count as of last week was still 15.8 percent higher than it was a year ago, but any comparison with 2020-a year devastating for the U.S. oil industry-should sound an alarm bell.

The industry is also signaling it has no big production growth plans. In fact, it has been signaling this for quite a while, with executives noting they do not have much motivation to boost production, even with most forecasters expecting a tighter supply situation in crude oil later this year.

Related: Pioneer CEO Sees $100 Oil By End Of Year

To begin with, oil and gas companies in the U.S. are quite aware that they are operating in a hostile environment. President Biden has been openly antagonistic to that industry, blaming it for high retail fuel prices and for making record profits, accusing it of war profiteering and threatening windfall taxes in retaliation.

Calls from the White House to boost oil production have mostly fallen on deaf ears because of, among other things, various regulatory requirements that make production expansion a lengthy process that many in the industry have been complaining about.

Then there is inflation. It's easy to ignore when you're busy berating shale oil and gas producers for their record profits, but it has not gone away. It is, in fact, very much still present and guiding companies' plans for the immediate future.

"We've seen anywhere between 30 and 50 per cent inflation - depending on which cost category you're talking about - that's what we're walking into in 2023," said the chief financial officer of Devon Energy, Jeff Ritenour, during the company's latest earnings call, as quoted by the Financial Times.

In that, Ritenour echoed comments made a couple of months ago by Pioneer Natural Resources' CEO, Scott Sheffield, following remarks by White House energy advisor Amos Hochstein, who called the oil industry "un-American" because of companies' refusal to switch back to growth mode.

"He was criticising the majors and independents for not growing more," Sheffield told the FT in December. "He doesn't realise if we wanted to grow more than 5 per cent, I'd have to call up all the service contractors; they're going to charge me 30 to 40 per cent more; it's going to take a year to build new equipment; it's going to take two years to start showing results. By that time, you may go through an oil price collapse." 

Because of higher costs, even if oil and gas production in the shale patch hits a record in March, the same won't be true of shale drillers' cash flow. According to Rystad Energy, that peaked last year, hitting $104 billion, and is set to decline to $87 billion this year.

That's bad news for production plans because higher cash flows brought about by higher oil and gas prices helped shale drillers return a lot of cash to investors after years of burning through it in order to see just how fast and how much they could increase production.

Speaking of investors, they are yet another factor limiting any production growth potential for U.S. shale drillers -precisely because of those years of drillers burning through cash to see just how much oil and gas they could produce. Investors have had enough of uncontrolled growth. And the companies know it.

"Significant growth is still off the cards for the majority of public shale oil E&Ps, who have continued to set cash return targets over production targets and are not willing to budge from focus on capital discipline," a Rystad analyst, Matthew Bernstein, told the FT last week.

Indeed, with cost inflation where it is, with the Fed signaling it will not change course on interest rates anytime soon, and with an administration unlikely to suddenly become friendly to oil and gas, chances are there will not be much further growth in shale oil and gas production this year. Even if prices rise, which most analysts believe they will because global supply remains tight and China is expected to roar back to its usual growth pace before long.

By Irina Slav for Oilprice.com

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Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More