For a second consecutive year, U.S. shale producers are finding themselves cutting capital spending for the following year, as investors continue to demand returns from the frenzied drilling over the past three years.
The U.S. shale patch has disappointed investors with the lack of meaningful returns and now, squeezed between the scarce availability of capital from debt and equity markets and investors demanding more profits, many U.S. oil and gas firms are reducing capital expenditure plans for 2020. Producers are also cutting production targets and now admit that the fast-paced growth of the past two years will slow down to moderate growth over the next few years.
U.S. oil production growth is already slowing down, and growth will continue to slow, as investor demands for discipline spending, weak oil prices, little room for productivity gains, and parent/child well issues have started to weigh heavily on growth rates.
OPEC and the International Energy Agency (IEA) continue to see U.S. oil production growing by more than 1 million bpd in 2020, but other analysts now expect much lower growth from the shale patch.
U.S. shale producers are set to reduce capital spending by around 13 percent next year compared to this year, according to estimates from U.S. financial services firm Cowen & Co, as carried by Reuters. Of the 21 U.S. producers that have issued guidance for 2020, as many as 15 firms plan to slash spending, according to Cowen & Co.
Apache Corp, which is set to announce its 2020 capital plan in February next year, has already said that it expects upstream capital spending next year to be 10-20 percent below this year’s US$2.4 billion budget.
“This will enable us to generate organic free cash flow that covers the current dividend and puts us on pace to fund a multiyear debt reduction program, while also delivering modest year-over-year oil production growth,” Apache CEO and president John Christmann said in the Q3 results release. Related: All Eyes On OPEC As Another Oil Glut Looms
Scott Sheffield, president and CEO at Pioneer Natural Resources, said on the Q3 conference call “I’ve been on public record talking about the Permian is going to slow down significantly over the next several years.”
“A lot of it has to do with free cash flow to start with, the free cash flow model that public independents are adopting, the issues that private equity firms are going through in regard to consolidation-reducing activity,” Sheffield said.
OPEC and the IEA continue to expect U.S. production to grow by more than 1 million bpd in 2020, with OPEC seeing American production growth at 1.5 million bpd, despite slightly lowering forecasts in its latest report.
But Goldman Sachs has cut its growth and spending forecasts for the U.S. oil sector. The investment bank now expects U.S. oil production to rise by 600,000 bpd in 2020 compared to 2019, implying an 8-percent capex decline.
According to Wood Mackenzie, growth is significantly slowing and “the tide is ebbing.”
Next year, growth will be just 500,000 bpd and the exit rate, that is monthly year-on-year growth rate, could fall close to zero, according to Robert Clarke and R.T. Dukes of WoodMac’s Lower 48 Upstream Research team.
The slowdown mostly reflects the fact that Independents, which produce 80 percent of Permian volumes, are slashing spending.
“They’re being forced by investors to generate cash flow and pay dividends,” WoodMac’s experts said last month.
Earlier this month, IHS Markit issued an even gloomier forecast for U.S. production growth, expecting U.S. production growth to be 440,000 bpd in 2020, “before essentially flattening out in 2021.” Related: U.S. Shale Growth To Flatline Within 2 Years
“Going from nearly 2 million barrels per day annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” Raoul LeBlanc, vice president for North American uncoventionals at IHS Markit, said.
Persistently low oil prices and investor demands for returns amid closed capital markets will shape the U.S. oil production trends in the coming years, according to IHS Markit’s report.
With capital discipline required by investors and WTI Crude prices expected to average around US$50 in 2020 and 2021, IHS Markit expects capital spending for onshore drilling and completions to fall by 10 percent to US$102 billion this year, by further 12 percent to US$90 billion next year, and by another 8 percent to US$83 billion in 2021.
Reduced capital availability in the U.S. shale patch leads to reduced spending on drilling, which in turn results in lower growth rates.
Pioneer’s Scott Sheffield put it bluntly on the conference call: “I don't think OPEC has to worry that much more about U.S. shale growth long-term.”
By Tsvetana Paraskova for Oilprice.com
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