In the recent past, shale oil drillers have acted to create a cap on oil prices by drilling heavily any time the price of crude seemed to get too high. Despite climbing oil prices, shale drillers seem to be absent. Collin Eaton and Christopher Matthews explain why at The Wall Street Journal, writing:
Shale companies pumped with abandon anytime oil prices rose sharply last decade. But as crude tops $70 a barrel, they are barely doing enough to sustain U.S. production.
Frackers have been forced to rein in spending and live within their means after many investors lost faith in the companies following years of poor returns, lenders reduced their credit lines and capital markets showed little interest in funding expansive new drilling campaigns.
The result is that shale drillers, which in the past have played the role of the oil world’s swing producer by quickly increasing output to meet demand, are largely standing pat for now, as the reopening of Western economies leads to a resurgence of global oil and gas prices.
The companies are raking in more cash than ever. Public shale companies that drill primarily for oil collectively generated a record $4.1 billion in free cash flow in the first quarter of 2021 and are poised to take in almost $15 billion for the year if prices remain higher, according to consulting firm Rystad Energy.
But instead of pumping that money back into drilling as they have historically done, large producers such as Occidental Petroleum Corp. OXY -0.73% and Ovintiv Inc., the company formerly known as Encana Corp., have said they plan to focus on reducing debt, keeping U.S. output flat. Other sizable shale drillers such as Pioneer Natural Resources Co. PXD -0.51% and Devon Energy Corp. DVN +0.16% are socking away money to return to investors in the form of variable dividends, one of the enticements they want to use to lure more investors back.
“We’re producing all this free cash flow, but it’s not going out to investors yet,” said Scott Sheffield, chief executive of Pioneer, noting that many companies are focusing on debt before they return cash to investors. “There’s no reason for them to buy into this sector at this point in time.”
Even as oil prices reached their highest level in six years last week, many drilling rigs remain idle. The U.S. is producing roughly 2 million barrels a day less than it was before the pandemic. The number of active rigs drilling for oil rose by two this week and stands at 378, down from 683 pre-Covid-19, according to oil-field services firm Baker Hughes Co. Shale companies have dipped into their stash of drilled-but-still-dormant wells to help maintain output cheaply.
If shale companies don’t add more rigs, U.S. oil production could fall by the end of the year, said Shaia Hosseinzadeh, a managing partner of OnyxPoint Global Management LP. The investment firm estimates that 450 rigs are needed to maintain current oil production levels and 575 rigs are needed to get it back to pre-Covid-19 levels. The problem for fracking companies, Mr. Hosseinzadeh said, is that they can’t access cheap capital any longer.
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