• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 3 hours GREEN NEW DEAL = BLIZZARD OF LIES
  • 6 days If hydrogen is the answer, you're asking the wrong question
  • 2 hours How Far Have We Really Gotten With Alternative Energy
  • 10 days Biden's $2 trillion Plan for Insfrastructure and Jobs

Breaking News:

Kenya and Uganda End Oil Imports Dispute

Rystad Energy

Rystad Energy

Rystad Energy is an independent energy consulting services and business intelligence provider offering global databases, strategic advisory and research products for energy companies and suppliers,…

More Info

Premium Content

U.S. Shale Is Refusing To Reinvest Despite Record High Cash Flow

  • U.S. shale producers saw reinvestment rates hit an all-time low in the third quarter and saw record levels of free cash flow 
  • A group of 21 public U.S. shale companies that are expected to produce 40% of 2021 output had a reinvestment rate of 46%
  • Despite seeing the strongest cash flow from operations since the second quarter of 2019, these shale producers’ capital expenditure was remarkably low
rig

Reinvestment rates among US shale oil producers hit an all-time low in the third quarter of 2021, resulting in a record free cash flow for the quarter, and are projected to fall even lower by year-end according to a Rystad Energy analysis. The analysis focused on a peer group of 21 public US shale oil producers, excluding majors, that together account for 40% of the expected 2021 output.

The peer group’s combined reinvestment rate in the third quarter of 2021 was 46%, down from 53% over the same period in 2020 and way lower than the historical average of above 130%. The reinvestment rate is calculated by comparing shale producers’ oil and gas capex against their cash flow from operations (CFO). The CFO of the last quarter was the strongest since the second quarter of 2019.

The analysis shows $7 billion in underspending by shale producers over the third quarter of 2021, comparing oil and gas capex with CFO. Operators managed to slightly increase peer-group quarterly capex in this year’s third quarter to $5.9 billion, up from $5.3 billion in the previous quarter, while further increasing CFO to $12.8 billion. All but one operator balanced spending in the third quarter of this year, reaching a new level of industry-wide cash balancing.

“Such a low reinvestment rate stands out for shale industry observers, especially as the peer group reported a record-breaking free cash flow (FCF) and earnings before interest, tax, depreciation and amortization (EBITDA) of $6 billion and $16 billion, respectively. But it’s not the end of the reinvestment slide,” says Alisa Lukash, vice president for North American shale at Rystad Energy.

Rystad Energy projections show that reinvestment will fall further to 40% in the fourth quarter of 2021. Also, for the first time since late 2018, the group’s combined net debt dropped below the eight-year average floor of $52 billion, coming in at $51 billion for the third quarter. Additionally, leverage ratios continued their consistent decline in keeping with the past three quarters.

Third-quarter results show several large independent operators ramped up spending in line with another financially robust quarter, in part due to the strong recovery in West Texas Intermediate (WTI) crude prices. Operators, as expected, started to communicate 7% to 15% cost inflation, with much of the impact anticipated to come in early 2022. However, this is expected to be absorbed by improved well productivity and capital efficiencies in most cases.

Combined third-quarter net income for the peer group amounted to $5.3 billion, double the income earned in the second quarter of 2021 and significantly higher than the sizable losses of $6 billion and $2.1 billion in the third and fourth quarters of 2020, respectively. EBITDA, meanwhile, recovered to $16.3 billion in this year’s third quarter, a level not seen historically. FCF across the peer group was $5.6 billion, a rise of $500 million from the previous quarter and more than double the $2.5 billion seen in last year’s final quarter.

Dividend payments jumped by 70% for the peer group in this year’s third quarter versus the second quarter. In comparison, the actual dividend-to-capex ratio increased to 26% compared to 17% in the preceding quarter. Further capital spending control by the industry was aimed at deleveraging and garnering stable shareholder support. Stock buybacks have predominantly been paused as the market recovered naturally with the WTI price increase. However, a few companies (CLR, FANG, PDCE) initiated buybacks amounting to $200 million.

For the first time since late 2018, the peer group dropped combined net debt below the eight-year average floor of $52 billion, reporting $51 billion for this year’s third quarter. Many operators mentioned revised hedging plans for 2022 due to lower expected leverage. Both leverage ratios – total debt to assets and total debt to equity – have consistently declined during the last three quarters. Despite more robust stock prices driving total equity up in 2021, the decline in leverage ratios has been partly offset by consistent debt issuance flared by merger and acquisition opportunities in the shale sector.

ADVERTISEMENT

By Rystad Energy for Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment
  • ROBERT MCMILLAN on November 22 2021 said:
    Refusal versus decision.....an interesting play on words and not one meant to appreciate what the "shale drillers" have, and can, accomplish. Maybe it is what shareholders and owners see as a prudent course to survive the next downturn. Once in a while you need to take some money off the table.
  • John Galt on December 09 2021 said:
    So - they figure they are better off letting supply be a little tight to keep prices up. Sounds like a smart business decision to me.

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News