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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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The Dawn Of A New Era For U.S. Shale

Higher oil prices and capital expenditure discipline are setting the stage for the highest free cash flow on record for the world’s exploration and production companies this year. And U.S. shale firms—set to generate $60 billion free cash flow—are primed for playing a key role in the record-breaking free cash flow from global upstream operations.   The U.S. shale patch is expected to be the biggest beneficiary of capex discipline and high oil prices, as well as the largest contributor to the highest-ever free cash flows from the upstream business globally, independent research firm Rystad Energy said in a new report.

$70 oil can certainly help a lot, but it is also capital discipline at every single oil company—from supermajors to U.S. independents—that is contributing to record cash flows this year. 

Free Cash Flow Set To Hit Record-Breaking $348 Billion in 2021

The world’s public oil firms are set to see their combined free cash flow—all cash flows from upstream activity excluding such from financing or hedging effects—surge to a record-breaking $348 billion in 2021. According to estimates from Rystad Energy, this would be $37 billion higher than the previous all-time high of $311 billion, which was generated in 2008. Back then, just before the financial crisis, oil prices averaged $100 a barrel that year.  

The key driver of record cash flows would be the U.S. shale patch, which is estimated to rake in nearly $60 billion in free cash flow before hedging effects, Rystad Energy forecasts. 

This would be quite a U-turn in the financial fortunes of U.S. shale drillers, which have struggled to generate positive free cash flow for a decade since the shale revolution began.  

The Dawn of ‘New Shale Era’

According to Bloomberg Intelligence estimates, U.S. shale producers are expected to generate a combined $30 billion in free cash flow in 2021 amid disciplined capital spending and higher oil prices. That’s so different from the past boom and bust cycles where the U.S. shale patch loaded up on debt to drill and produce as much oil as possible, contributing to sinking oil prices. 

This year, however, could turn out to be the beginning of what analysts have started to call “a new era” for U.S. shale, where returns to shareholders and paying down debts take precedence over production growth and record output. 

The expected windfall from free cash flow this year is just one-tenth of the $300 billion in net negative cash flow the U.S. shale industry has lost in the 15 years since the first shale boom, per Deloitte estimates from last year. 

Nevertheless, the expectations of free cash flow this year make analysts optimistic that the shale patch is at a turning point and will keep discipline for at least another year or two.

According to Rystad Energy, shale’s free cash flow in 2021 is expected to exceed the free cash flows from both the deepwater and shallow water segments. 

Related: Rising Demand Closes The Gap Between WTI And Brent Prices

The conventional onshore supply segment will earn the biggest share of free cash flow, at $160 billion, but this will still be lower than the record from these upstream activities set in 2011, the intelligence company said. 

Oil Firms Primed For Super-Profits

Gross revenues at all public upstream firms are set to surge by 55 percent, or by nearly $500 billion, this year compared to last year, thanks to higher oil prices, rising global demand, and a tighter market. Considering that spending levels of listed E&P firms globally are set for just a 2-percent increase this year—courtesy of still strong capital discipline across the board—producers are set for materially higher profits, Rystad Energy reckons. 

“Oil demand has gradually increased after the initial shock of the Covid-19 pandemic, and OPEC+ continues to hold back volumes from the market. The consequent high price movement has been further supported by a slow ramp-up in US tight oil activity. In conjunction with the persisting low investment environment, E&Ps are enjoying super-profits,” Espen Erlingsen, head of upstream research at Rystad Energy, said.  

Income at the supermajors, for example, nearly returned to pre-pandemic levels in the first quarter of this year, thanks to dramatically higher oil prices. Further upsides in earnings are on the horizon with this quarter’s oil price rally, analysts say. 

Higher oil prices, conservative spending, and the benefits of the massive cost cuts from last year are setting the stage for record cash flows at Big Oil this year if the price of oil averages $55 per barrel, Wood Mackenzie said at the start of this year. 

This forecast could even turn out to be quite conservative, considering that investment banks and forecasters now see oil prices averaging at least $65 a barrel this year, and a growing number of analysts and top executives at Big Oil aren’t ruling out a brief spike to $100 per barrel in coming quarters.

The immediate priority for E&P firms, including in the shale patch, will be to use the expected super-profits and record cash flows to pay down debts and reward shareholders. Capital discipline will likely hold this year, but upstream investment will need to rise if the world is to avoid sleepwalking into a supply deficit within a few years. 

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on June 27 2021 said:
    Indeed there could be a dawn of a new era for US shale oil, a period of peaceful and beneficial cooperation with OPEC+ and stability in the global oil market provided shale oil drillers continue to exercise self-discipline and don’t revert to their previous bad oil habits of excessive and reckless overproduction and try tom undermine OPEC+ efforts.

    By exercising discipline in their production US shale oil drillers could be generating an estimated cash flow of $30 bn this year for the first time since the inception of the US shale oil industry in 2008, reducing their multi-billion debts and rewarding their investors.

    They should continue to heed the wise advice of the shale oil veteran Harold Hamm ‘not to drill themselves into oblivion.’

    In a nutshell, they should separate the economics of oil from the empty geopolitical slogans encouraged by former US president Trump of ‘making America great’, ‘US energy dominance’ and ‘oil independence’. These are bankrupt slogans and they don’t earn shale drillers any positive cash flow.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

Leave a comment




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