What’s Next For U.S. Shale Giants?

For OPEC, U.S. shale oil is a curse. For the Trump administration, it is the biggest tool to help achieve what the White House has dubbed energy dominance. There are hundreds of players of all sizes in the shale patch, but the bulk of production is courtesy of just 30 companies-the shale oligopoly.

These 30 companies include Big Oil giants like Exxon, Chevron, and ConocoPhillips, large independents such as Continental Resources, EOG, Apache, Anadarko, and Pioneer, and foreign companies like India's Reliance Industries, Sinopec, and even Spanish Repsol. According to data from S&P Global Market Intelligence, the top 10-excluding vertically integrated players-are:

(Click to enlarge)

Source: Forbes

Shale oil is unquestionably a hot topic. It will become even hotter with the ongoing debate over whether the shale boom is a scam because shale producers aren't making any profits, or it's a genuine boom that has tipped the scales of global oil dominance away from OPEC.

As usual, the truth can be found somewhere in the middle. There can hardly be any doubt that shale production is indeed growing, driving the increase in overall U.S. crude oil production. Last week, the EIA reported the average daily production had hit 9.78 million barrels in the second week of December. This Monday it said that production from the shale patch could hit 6.4 million bpd in January, up from 5.2 million bpd in January 2017. The IEA warned that the growth in U.S. shale production could lead to another glut in 2018.

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On the other hand, there are also reports that shareholders are pressing shale boomers to stop focusing on production growth alone and start returning cash. The Wall Street Journal's Bradley Olson and Lynn Cook recently wrote how a dozen large shareholders in shale producers met to discuss how to best apply the pressure they felt was needed so the producers started producing not just oil, but some profits, too.

The problem for investors is the exclusive focus on growth, and they are voicing their concerns loudly enough for some shale boomers to start changing their priority list. Anadarko, for example, the WSJ authors write, decided to use $2.5 billion from its fatter cash pile to buy back shares instead of spending them on more drilling. Continental, for its part, has drilled almost no new wells since the start of the year. Others are also downgrading production growth as a priority in favor of the bottom line.

Yet problems remain, even for the big 30. Free cash flow is still a challenge. For the last decade, energy companies have accumulated total shale expenditure of $280 billion more than the revenues they have generated from these operations. There is also the issue of debt, which for many producers is still uncomfortably high: As of last year, the debt-to-equity ration of many large shale players was in three-digit territory.

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On top of all this, there's talk that the space for further efficiency gains in the drilling and extraction processes is quickly falling. This is just how things go-efficiency gains are a finite resource so to speak, and shale oil and gas drillers have been using this resource extremely actively over the past couple of years. Even new drilling rigs are no longer a trustworthy indication of production trends in the shale patch: the extraction rates per well have also been improving.

None of this means that shale oil and gas are nearing the end of their prime. On the contrary: there may be many more good years if the drillers follow through with their plans to stop focusing so much on production growth. This would also push prices up, making both executives and shareholders happy.

By Irina Slav for Oilprice.com

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