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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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The Drilling Frenzy Is Over For U.S. Shale

A few high-profile shale executives say the glory days of shale drilling are over.

In a round of earnings calls, the financial results were mixed. A few companies beat earnings estimates, while others fell dramatically short.

But aside from the individual performances, there were some more newsworthy comments from executives on the state of the industry. A common theme emerged from several notable shale executives: the growth frenzy is coming to an end.

The chief executive of Pioneer Natural Resources, Scott Sheffield, said that the Permian basin is “going to slow down significantly over the next several years,” and he noted on the company’s latest earnings call that the company is also acting with more restraint because of pressure from shareholders not to pursue unprofitable growth. “I’ve lowered my targets and my annual targets, a lot of it has to do with…to start with the free cash flow model that public independents are adopting,” Sheffield said.

But there are also operational problems that have become impossible to ignore for the industry. He listed several factors that explain the Permian slowdown: “the strained balance sheets lot of the companies have, the parent-child relationships that companies are having, people drilling a lot of Tier 2 acreage,” Sheffield said. “So I'm probably getting much more optimistic about 2021 to 2025 now in regard to oil price.” In other words, U.S. shale is slamming on the brakes, which may yet engineer a rebound in global oil prices.

He said that this would be good news for OPEC. “I don't think OPEC has to worry that much more about U.S. shale growth long-term,” Sheffield said. “And all that is very beneficial. So we are probably going to be more careful in the years 2021 to 2025 because there's not much coming on after the three big countries that are bringing on discoveries over the next 12 months Norway, Brazil and Guyana.”

Still, the oil market is starting down a glut in 2020 and OPEC is trying to press its members to tighten up compliance with the production cuts in order to boost prices.

Sheffield wasn’t alone. Mark Papa, CEO of Centennial Resource Development (and former CEO of EOG Resources), was also downbeat on growth prospects. “At a September investor conference, I predicted that 2020 total U.S. year-over-year oil growth would be 700,000 barrels per day which at that time was considerably below consensus,” Papa said on an earnings call on Tuesday. “Given additional data I now think that 2020 year-over-year oil growth will be roughly 400,000 barrels per day which is below current consensus.”

He noted that U.S. oil production has been essentially flat for 9 out of the last 10 months, and “it’s likely to slightly decline over the next six months.” Related: How Much Oil Is Up For Grabs In Syria?

Echoing Sheffield’s comments, Mark Papa said that this wasn’t only due to spending cuts. “Most people will ascribe the low U.S. growth to capital discipline. But I think the larger reason is what I've been talking about for several years the shift to Tier 2 and 3 drilling locations in all shale plays and increasing parent-child issues in the Permian,” Papa said.

He added that this is not a temporary problem. “I believe U.S. shale production on a year-over-year growth basis will be considerably less powerful in 2021 in later years than most people currently expect,” Papa said. “I'll leave it to others to opine on what this means for global oil markets.”

Notably, Scott Sheffield of Pioneer Natural Resources went out of his way to castigate the industry for the runaway flaring rates in the Permian. “We do not connect any new horizontal wells to production unless the gas line is already in place,” Sheffield said. “I think that’s something that should be adopted by all producers in the Permian Basin.”

The tone of his comments seemed to reveal a concern about the industry losing its social license to operate because of rampant flaring and growing concerns about climate change. Sheffield also made an effort to point out that Pioneer does not have exposure to federal land, minimizing risk from a political backlash following the 2020 election. Related: Protect The Oil: Trump’s Top Priority In The Middle East

Meanwhile, Chesapeake Energy saw its share price fall nearly 20 percent on Tuesday after it warned in an SEC filing that low prices “raises substantial doubt about our ability to continue as a going concern.”

Chesapeake is cutting spending dramatically and expects to see its production decline next year. The real question is if Chesapeake’s woes say something broader about the health of the industry.

The company’s CEO seems to think so. “When you see a company like Chesapeake with the strength and quality of our gas portfolio, reducing capital, I think it should be a good indication of directionally where others should be reducing activity as well,” Chesapeake Energy’s CEO Robert Lawler said on an earnings call.

By Nick Cunningham of Oilprice.com

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  • Lee James on November 06 2019 said:
    Domestic oil CEOs don't speculate much on what an early demise of US oil means to us as a nation. But I think we need to look ahead.

    Our President has touted being oil independent, instead of dependent -- not much evidence of that. Oil prices will likely go up, not down. When oil-holdings are in the hands of certain international autocrats -- who are motivated by nationalistic prowess -- what then for world peace?

    And, if oil clean-up is up to companies going under in the U.S., who gets stuck with that bill? Flaring and leaks are already pretty bad today, as cited in the article.

    We need a clear-headed national energy plan. We most decidedly do not have one. In fact, most folks are content to just let business take car of itself, day-to-day, until suddenly . . . "nobody's home" in the ole corporate office.
  • David Strong on November 08 2019 said:
    I've had a crazy idea for a few years. Why doesn't the Federal Government take over these failed oil companies and subsequent rigs and equipment that are leaving tax payers on the hook to pay for their desertion?

    Many citizens like government run schools, health care, public transit, retirement i.e., social security etc... I believe it's a good strategy militarily. Plus the oil companies couldn't inflate oil to appease executives, board members and shareholders. Keep oil around $50 a barrel for citizenry. Government can't rely on foreign oil in times of war or other crises. (and neither can middle class or the poorest among us)
  • Rudolf Huber on November 12 2019 said:
    Who do I call if I want to talk to Mr. Shale? Oh, there is no one who represents shale? OK, another way. As shale is, all the same, there must be Mr. Averages. There is not. Shale is what - a wild bunch of vastly different businesses with different reserves, different methods, different capital ceilings, different ... OPEC also thinks that shale is a monolith and if only the right remedy would be applied, everyone will react in the same way. But they are not. North American shale drillers are a more diverse bunch than OPEC drillers among themselves. USD 50 oil is a problem for some, not for others. The bad beans wilt and die, the good ones get even stronger. Thats business

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