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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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What’s Next For U.S. Shale Giants?

Midland

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.

Related: Saudi Arabia’s Big Oil Gamble

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.

Related: Oil Market On Edge Following Outages

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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Leave a comment
  • Citizen Oil on December 21 2017 said:
    All the new articles state the producers will focus on shareholder value rather than growth. Every month they grow at insane rates. Which producers are listening to their shareholders ? Please write a story on that. Otherwise everything you write is just rhetoric. These guys are hamsters on a wheel. The only way they are going to stop is run out of food or have a heart attack.
  • Disgruntled on December 21 2017 said:
    Business 101 says don't saturate the market with more product than the market will bear. The automobile manufacturers don't build more cars than the market demands. That's why pickups are so freaking expensive. However, I think the TV manufacturers do. Have you seen the price for a 43" 4D at Best Buy?! I think the shale guys align with the thinking of the TV guys.
  • don clifford on December 21 2017 said:
    A takeoff on "build it and they will come". Expand your customer base with cheap and plentiful product, and get them hooked.
  • Brian on December 25 2017 said:
    Your articale says that, Continental has drilled almost no new wells since the beginning of the year. I question how many is "Almost no new wells". I know of at least a dozen within 20 miles of my house, of those wells, many were drilled within the last 6 months.

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