• 4 minutes Why Trump Is Right to Re-Open the Economy
  • 7 minutes Did Trump start the oil price war?
  • 11 minutes Covid-19 logarithmic growth
  • 15 minutes Charts of COVID-19 Fatality Rate by Age and Sex
  • 18 minutes China Takes Axe To Alternative Energy Funding, Slashing Subsidies For Solar And Wind
  • 3 hours America’s Corona Tsar, Andrew Fauci, Concedes Covid-19 May Be Just a Bad Flu With a Fatality Rate of 0.1%
  • 44 mins Russia's Rosneft Oil Company announces termination of its activity in Venezuela
  • 5 hours Saudi Arabia Can't Endure $30 Oil For Long
  • 2 hours KSA taking Missiles from ?
  • 4 hours Where's the storage?
  • 7 hours TRUMP pushing Hydroxychloroquine + Zpak therapy forward despite FDA conservative approach. As he reasons, "What have we got to lose ?"
  • 4 hours Western Canadian Select selling for $6.48 bbl. Enbridge charges between $7 to $9 bbl to ship to the GOM refineries.
  • 4 hours Hillary Clinton tweeted a sick Covid joke just to attack Trump
  • 6 hours China extracts record amount of natural gas from Gas Hydrates in South China Sea
  • 8 hours Wait till America opens their Q1 401k Investment Statements and see they have lost 35% of their retirement savings. They can blame the Authoritarian Chinese Communist Party..
  • 9 hours There are 4 major mfg of hydroxychloroquine in the world. China, Germany, India and Israel. Germany and India are hoarding production and blocked exports to the United States. China not shipping any , don't know their policy.
  • 11 hours Oxford Epidemiologist: Here’s Why That Covid-19 Doomsday Model Is Likely Way Off
Alt Text

Building The Sustainable City Of The Future

Masdar City in Abu Dhabi…

Alt Text

Why Are Tesla Cars So Popular?

From their sleek futuristic design…

Alt Text

Russia’s Unexpected Advantage In The Oil Price War

The global economic downturn due…

Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

A Paradigm Shift In The Permian

The U.S. shale industry is increasingly dominated by the oil majors, with small and medium-sized drillers under financial pressure.

Shareholders, banks and other analysts are losing patience with unimpressive performances of a large swathe of shale companies. For years, shale drillers borrowed money to ramp up production, promising their lenders and investors that profits would eventually flow as quickly as the oil. But since 2011, the shale industry has burned through roughly $200 billion. There has certainly been an oil boom, but no corresponding boom in profits. A decade of near-zero interest rates has allowed the drilling frenzy to continue. However, limitless growth is coming to an end.  

Wall Street has not completely soured on the sector. “[U]nfavorable 4Q18 [free cash flow] for E&Ps along with investor concerns regarding the US onshore land environment for Oil Services may keep investors more positive on Majors/Midstream until E&Ps/Oil Services bellwethers deliver in line or better than expected quarterly results,” Goldman Sachs wrote in a note. That’s just a complicated way of saying that investors are shunning shale E&Ps and oilfield service companies in favor of the oil majors and pipeline companies. 

The investment bank held a mini-conference in Houston on March 12-14 with the management teams of 23 companies from oilfield services, E&Ps, midstream and industrial accompanies, and wrote up some key takeaways.

One conclusion was that pressure from shareholders is having an effect. Smaller shale companies are either cutting their drilling budgets or vowing to keep them in check, even if prices continue to rise. “[M]ost producers indicated they do not plan to raise activity/capex if oil prices are above the levels set in 2019 budgets ($50-$55/bbl WTI),” Goldman Sachs wrote in its report. Related: One Last Warning For The U.S. Shale Patch

At the same time, while drillers are beginning to show restraint, Wall Street wants more proof before they bring in E&Ps from the cold. “[G]iven poor 4Q18 capex/cash flow, little credit for discipline

likely will be afforded in stocks until investors see capex/cash flow execution,” Goldman Sachs said.

Still, 2019 offers some hope. “The setup into 1Q earnings, particularly for companies that have guided for little organic growth (CXO, EOG, PXD), appears favorable subject to these companies demonstrating guidance is conservative,” Goldman analysts wrote in their report, using the tickers for Concho Resources, EOG Resources, and Pioneer Natural Resources.

Even as smaller companies are forced to make cutbacks, the oil majors are betting their futures on the Permian. On this, Wall Street appears more optimistic. “Big Oils are well positioned to generate outsized free cash flow,” Goldman said. The investment bank issued Buy ratings for both ConocoPhillips and BP, noting that they have breakevens at $50 per barrel. Also, some of the oil majors are hitting a “sweet spot,” with good timing on the completion of some large-scale projects and a rebound in oil prices. “Globally, we continue to have a positive view on majors, with a unique combination of strong price realizations (primarily Brent pricing), declining capital spending, growing production and outsized dividend yields,” Goldman Sachs concluded. Related: Refiners Prepare To Profit From Dramatic Oil Product Switch

The bank was particularly keen on BP, which is about to post “one of the strongest free cash flow turnarounds in the industry,” with a series of projects reaching completion that could add roughly 400,000 bpd of new supply this year, compared to 2017 totals. As a sweetener, BP is well positioned ahead of the 2020 regulations from the International Maritime Organization because it completed upgrades to some of its refining assets. The regulations are set to put a premium on middle distillates as sulfur limits force out heavy fuel oil from the shipping industry. BP’s upgrades apparently position it well for this change.

While the oil majors appear to be doing well, the same cannot be said for upstream shale E&Ps, who appear to be hitting the brakes on drilling activity. The rig count continues to decline, with oil rigs dipping to 833 last week, down from a peak of 888 last November.

Recent EIA data suggests the pullback is having an effect on production. U.S. oil production fell back a bit in December, falling to 11.849 million barrels per day (mb/d), ending consecutive months of large gains.

Weekly EIA data shows output falling to 12 mb/d on March 8, a less reliable estimate, but a more recent one. The agency also downgraded its projection for production for the full year of 2019 by 100,000 bpd, another piece of evidence suggesting that a drilling slowdown is impacting output.

The U.S. will still see significant gains in oil production this year, but as time wears on, it will be the oil majors that account for much the growth, not the shale names of yesteryear.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment
  • Tripp Mills on March 24 2019 said:
    Clearly someone who shorted BP - as mine was hit hit with puts puts puts puts all week long last week (the discount brokerages seem to think it is ok to short and put put put puttheir client accounts and take our stock by doing this - SOMEONE NEEDS TO ACT!) Its impossible to hedge even if you take the risk to do so because the traders at the discount brokerages loan out shares (likely unlimted, buy all kinds of negatively impacting currency positions, have unreasonable requirements on any struggling company, etc. - i'm tired of it). How funny they could help clients and they could send the market up - what do they do SHORT and PUT and violate any fiduciary, etc. The FINRA lets them do it apparently (I emailed them also and of course hear nothing - they can be sued etc.)

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News