Concern about a seismic change in the U.S. shale industry with shareholder returns prioritized over spending on production has plagued analyst and banker circles for over a year.
Indeed, shale producers have become much more careful with their money, preferring to focus on shareholders over production even when prices rebounded after the pandemic lockdowns and the industry enjoyed windfall profits.
Yet despite this reprioritization, companies in the shale patch did increase their spending on production, Rystad Energy said in a new report this week. Reinvestment rates, or the ratio between capital expenditure and cash flow from operations, rose this year, to hit a three-year high, the firm said.
While in the first quarter of the year, the reinvestment rate in the industry stood at 58%, in the second quarter, it rose to 72%, Rystad said, based on analysis of a sample of 18 shale producers, excluding the supermajors.
Now, to be sure, this is still much lower than reinvestment rates during the shale boom years, when they regularly exceeded 100%. Yet it is a clear increase – and the highest since the second quarter of 2020 when the reinvestment rate reached 150%.
Having said that, Rystad points out that this is only part of the story. The other part is inflation, which has forced shale companies to increase their capital spending, contributing to the growth in reinvestment rates. Related: Chevron Evacuates Gulf Of Mexico Oil Platforms As Hurricane Idalia Approaches
Basically, the perception that the shale industry might be returning to a grow-at-will approach would be wrong. Capital discipline is here to stay, Rystad says, even though capex among the companies in the firm’s research sample had been on the rise for ten quarters in a row.
“At first glance, a rising reinvestment rate might point to a return to the old days of aggressive capital expenditure and rapid production growth,” Rystad senior upstream analyst Matthew Bernstein said.
“However, discipline is the name of the game for public shale companies now, which ensures this trend will not last. As inflationary pressures ease in the coming quarters and oil prices rebound, this spike will be a short-term anomaly instead of a shift of strategy.”
Indeed, the analytics firm said that the trend of rising capex will reverse by the end of the year, primarily thanks to the easing of inflationary pressures. The fact that most companies in the sample have already gone through more than 50% of their 2023 capex will also contribute to a slowdown.
Rystad Energy’s report is the latest addition to a growing body of research suggesting the boom years for U.S. shale are over. However, that does not mean U.S. shale is over. Quite the contrary, in fact, as detailed by Energy Intelligence’s Casey Merriman in a recent article.
In it, Merriman noted that although U.S. shale is unlikely to ever again deliver annual production growth of 1 million bpd, it is very much a thriving industry, which this year reached an all-time high daily average production rate of 12.8 million bpd, according to the Energy Information Administration.
The rig count is falling, and well productivity is declining more sharply than before. At the same time, however, some producers are reporting surprise productivity gains this year, boasting higher output with lower capex. The sweetest spots may be gone, but there is a consolidation drive going on in the shale patch once again, and that will help optimize drilling as it has done before.
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The shale revolution may be over, but after revolutions come calmer times, and U.S. shale seems to be living in these calmer times when there is no rush to see just how much more you can pump from a well. Rather, it’s a marathon of doing more with less, and for longer.
By Irina Slav for Oilprice.com
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