Cheap oil is an unalloyed good if you’re a buyer, but for suppliers it’s a different story. When the price of oil started to slide last summer, many expected OPEC to step in and cut production, easing the global oversupply and supporting global prices. The petrostate cartel, led by its largest producing member Saudi Arabia, elected instead to endure the bearish market and compete with upstart producers for market share. U.S. shale operators were the biggest target of this strategy, because while fracking has been enormously productive here, it’s a relatively high cost process.
With prices hovering around $60 per barrel today, many fracking operations have been put on hold, and the earnings reports from many of these shale firms paint a grim portrait of the industry. Hedge fund manager David Einhorn piled on the criticism of the industry’s inability to turn a profit this week, as Ed Crooks recapped for the FT:
[F]ocusing on cash as a more reliable guide to the true health of the industry, [Einhorn] highlighted how the large shale producers had since 2006 spent $80bn more in acquiring and developing reserves than they have made from selling oil. They were kept in business only by a constant inflow of capital.
The first quarter was especially unkind to U.S. shale firms. E.O.G. lost $170 million, Noble lost $22 million, Anadarko reported a $3.3 billion loss that included a writedown of nearly $3 billion, while Concho reported a meager $7.5 million profit. With a fracking backlog—a “fracklog”—growing and OPEC production still booming, there’s no indication that prices will rebound significantly anytime in the near future. Is this, then, the sign of boom about to go bust?
Maybe not. Crucially, shale firms are figuring out ways to turn a profit even as the margins shrink. The FT reports:
Noble reported a $22m loss for the first quarter, but said it had greatly improved the efficiency of its drilling…Concho, which operates in the Permian Basin of west Texas…raised the midpoint of the range of its guidance for 2015 production growth from 18 per cent to 20 per cent…Timothy Leach, Concho’s chief executive, said: “We expect to deliver higher production growth on a lower capital spend and with fewer rigs.” […]
[Anadarko] said it had cut the average cost of drilling a well in the Eagle Ford shale of south Texas by 14 per cent since the last three months of 2014.
Crooks isn’t as pessimistic about shale’s future, either:
[Einhorn’s] suggestion that the companies have nothing to show for their $80bn net cash outflow is misleading: they have been building up lease positions in oilfields that they can drill out in the future, and they have been acquiring expertise in how to extract that oil.
Moreover, their cash position had been on an improving trend. Last summer, before oil and gas prices plunged, leading US exploration and production companies were collectively on course to reach cash flow break-even in 2015…The oil crash has moved that point further away, of course, but shale companies have kept it within reach by cutting their costs sharply.
Cheap oil is hurting U.S. shale, but the fledgling industry was born from innovation, and it’s not yet done with refining its methods. Remember too that while the bonanza days of $100+ per barrel oil seem like a distant memory for these companies today, discount oil is having a similar effect on the budgets of the world’s petrostates. Private companies may fold in the months ahead if oil doesn’t rebound, but on the whole the U.S. will stay as strong as ever (studies have shown it to have a net positive effect on the American economy). The same can’t be said for Russia or Venezuela.