Rising Costs Will Continue To Erode U.S. Shale Profits

• Despite reporting record earnings in 2022, U.S. shale producers are warning that inflation will drag on profitability in 2023.
• Rising inflation has driven the breakeven price higher for shale companies, which could counter the companies’ higher budgets.
• Shale producers continue to prioritize returning profits to shareholders, but could see those profits come under pressure if costs rise.

Despite record earnings for 2022, the biggest independent U.S. shale producers continue to flag cost inflation as a drag on profitability for 2023.

This year’s capital budgets will be higher than in 2022 but the expenditures will not go towards a material increase in oil production as companies continue to prioritize returns to shareholders with the record cash flows and profits generated last year.   

But inflation hasn’t gone away and will not go away for at least a few more quarters, according to the top executives of the biggest shale-focused producers in America.

“We're doing what we can to cut costs and keep costs as low as possible in a, you know, inflationary environment,” Kaes Van't Hof, president and chief financial officer at Diamondback Energy, said on the earnings call this week.

The biggest headwind over the last six quarters has been casing costs, he added.

Diamondback’s chief operating officer Daniel Wesson added, “Hopefully, we'll start seeing some help on the inflation front here through the second and third quarter.”

Last year, Diamondback generated a record nearly $4.6 billion of Free Cash Flow and returned around $3.1 billion of cash to stockholders through a combination of growing base dividend, variable dividend, and share repurchase program.

Another producer, Devon Energy, booked record-setting operating results and the best financial performance in its 52-year history in 2022. Yet, its executives noted that the inflationary impact has been seen everywhere in its operations.  

“But it's the inflationary impact that we've seen across every -- frankly, every cost category,” Devon Energy’s CFO Jeff Ritenour said on the earnings call.

“We've seen, you know, anywhere between 30% and 50% kind of inflation, depending on which cost category you're talking about,” he added.

“That's what we're walking into in 2023,” Ritenour noted.

The cost inflation has certainly driven the company’s breakeven price higher, Devon Energy’s executive said. The breakeven price for the company has increased to around $40 per barrel WTI, from a breakeven point of $30 WTI price a year ago.  

By Tsvetana Paraskova for Oilprice.com

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