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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. 

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Not Even Higher Oil Prices Can Save U.S. Shale

The U.S. shale industry is burning through cash so fast that even the state of Texas is looking at government rationed production targets.  Texas Railroad Commissioner Ryan Sitton laid out his idea in an article for Bloomberg Opinion, proposing the commission institute a 10 percent production cut. It would mark the first time since the 1970s that the Railroad Commission regulated production. 

Sitton twisted himself into knots in an attempt to characterize OPEC abandoning production cuts as “anti-market” while describing his proposal to require cuts as a return to free market principles. Orwellian as it may seem, some Texas shale drillers welcomed government intervention, including Parsley Energy and Pioneer Natural Resources. 

Although production curtailments would boost oil prices, it could also destroy whatever shred of interest remains in the sector for investors. It remains to be seen if such an idea moves forward. 

The fact that the shale industry finds itself in such a massive bind, facing an existential crisis and pleading with the state to impose regulation, is a perfect capstone to a decade of unprofitable drilling. A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) offers an indictment of the industry’s financial performance.

A cross-section of 34 shale companies identified by IEEFA finds that they spent a combined $189 billion more than they earned over the past decade. That includes $2.1 billion in negative cash flow last year. 

Over the past ten years, the shale industry has dramatically ramped up oil production, allowing the U.S. to become the world’s largest oil producer. “Yet in financial terms, this production boom has been an unrelenting financial bust,” IEEFA analysts wrote. 

Notably, the 34 companies included in the analysis – which included large names such as Hess, Marathon, Pioneer Natural Resources, among others – posted negative cash flow in every single year over the past decade, IEEFA found. 

Related: Russia Needs Higher Oil Prices, But Won't Surrender
While it might be understandable that drillers burned through cash during the 2014-2016 downturn, only six of the 34 companies surveyed by the institute reported positive cumulative cash flow between 2017 and 2019. That is a rather grim statistic for an industry that has hyped various mantras – low breakevens, technological innovation, big data and digitalization, downspacing and most recently, capital discipline – to justify why the next round of drilling might be different.

The energy sector was “far and away the worst performer of the S&P 500 over the past decade,” IEEFA notes, “placing dead-last among all sectors for stock price returns in both 2018 and 2019.”

That was all before the global pandemic and the collapse of the OPEC+ deal. With WTI in the mid-$20s, the shale industry is in a much more profound crisis. Prices may even go lower in the weeks ahead.

Sector-wide spending cuts and mass layoffs are in the works. Bankruptcies are set to multiply.

Mandatory production cuts from Texas regulators, which still seems unlikely, would do very little to erase the worldwide glut. The “supply cuts would however remain much too small to offset the current 8 mb/d hit on demand from the coronavirus…and wouldn’t prevent an unprecedented inventory build over the next months which could still saturate local logistical capacity and push prices to cash-costs,” Goldman Sachs wrote in a note.

Related: The New Saudi Plan To Send Oil Prices Lower

The blistering growth rate of U.S. shale was already running on fumes at the start of the year, before the coronavirus spread around the world. Drillers were struggling at $50 WTI. With prices so far below that level at this point, the wheels are coming off of the shale complex.  

“When and if global oil markets stabilize, investors should remain deeply skeptical of a shale-sector turnaround, given the industry’s financially feeble performance over the past decade,” IEEFA analysts concluded in their report. “Cautious investors would be wise to view shale-focused companies as high-risk enterprises characterized by disappointing performance, weak financial fundamentals, and an essentially speculative business model.”

By Nick Cunningham, Oilprice.com

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Leave a comment
  • Brian Bresee on March 22 2020 said:
    Slightly higher prices will not save Saudi Arabia or Russia either, they are burning through their national savings as well at the current price. Business reality dictates you must sale your product for more than you paid for it, or you go bust, a risk for both Saudi Arabia and Russia too. An announcement will come soon for a new production deal, with the United States quietly being a part of it through reductions in well permits and other policy changes. When that announcement comes there will be a huge spike in oil prices, not something investors will want to be on the wrong side of.
  • DimitriAlwxander on March 22 2020 said:
    Nick,
    Your article is in correct. It really shows u do not know the oil and gas business model. When u drill a well and say it cost 4 million to drill and completer, do u know on average what you make and when you would make it?? No. Negative cash flow is part of the model. U drill a well for 4 million on average it’s worth 12 million But over the next 15 years. It takes About 18 to 24 months to recoup the 4 million and then u make the next 8 . The negative cash flow is because u get to write off more then u initially make that year. Your idea that all the shale companies lost money for a decade is a bit unrealistic, wouldn’t say?
    Please study the oil model and the financial acumen if it before before commenting .
  • Wayne Briggs on March 22 2020 said:
    In my opinion both Brian and Nick are correct to an extent. If Saudi Arabia can continue to flood the world with oil for a year or more than a very large number of American producers will go into bankruptcy thus helping Saudi Arabia reclaim additional and significant world market share. It seems to me that both Russia and Saudi Arabia are sitting at a table and each holding their guns in a game of Russian roulette with respect to their own economies in a hope to shatter the US shale oil boom. The fact is all three of them require oil prices to be much higher in order to meet everyone's needs. Oil prices will eventually move much higher as it is a requirement of demand and economics.
  • PeteDodge on March 23 2020 said:
    Where was Rose & Associates when the industry really needed it?
  • Jared _ on March 23 2020 said:
    As a Houstonian there's nothing new about what's happening, but it is compounded by COVID-19. KPMG accountants were telling me 18 months ago they anticipated massive vacancies in Downtown Houston, typically occupied by O&G, within 2-3 years. Well, it's come earlier than expected. 25% of natural gas was being burned off in the Permian because there simply wasn't anywhere to put it. Regional distributors were receiving supply for FREE! I don't feel sorry for those that got greedy. Tale as old as time. Atleast Shell knows well enough to assume a low barrel price.
  • Terry Neu on March 23 2020 said:
    Why not put a tariff on Saudi oil to bring it up to the cost of the production of American oil. This would have several positive effects:
    1) Help keep American oil producers afloat. None of us want to see the Arab oil embargoes again - which could happen if Saudi Arabia drives American producers under.
    2) Help reduce wanton usage of fossil fuels in the US due to extremely low prices.
    3) Provide some cash for the treasury. Prior to the Civil War, tariffs were the major source of revenue for the federal government.
    There seems to be something for liberals and conservatives, Democrats and Republicans, in this.
  • Seth D on March 23 2020 said:
    Dmitri Alexander says it well, no pun intended, that Nick Cunningham does not understand the oil and gas model and he only knows one thing. This is the year Shale will disappear, and just keep repeating a variation of that same wrong prediction every three days.
  • Grim Reaper on March 24 2020 said:
    Being energy dependent on the Arabs or the Russians is certainly a recipe for disaster. I therefore agree that tariffs is a great way to accomplish that. There is however one very troubling aspect to that and it has to do with the cost of producing American fuel, and gouging the consumer. Once you go down the path of artificially inserting government into the equation there needs to be a happy tradeoff of price controls, and market share.
    The government can prop up the domestic oil industry by instituting tariffs on foreign oil, and buying a certain amount of domestic produced oil to place in its reserve pool.
    The tradeoff would then be strict quota and price controls for the domestic market so the American consumer is not screwed at the pump by ever higher gas prices. So it is a fine line to walk in order to make our domestic production and consumption work in unison.

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