History shows that those who despise the U.S. stone sector are doing so at risk.
That has not stopped many experts from writing a coalstone, believing that low prices, high declining rates, and investor demand for capital efficiency have hampered growth potential. shale. These foundations existed before Covid-19, and the pandemic has only increased in weight.
Shale could have the last laugh, however, performing better than expected behind fairly lower costs.
The U.S. Energy Information Administration (EIA), OPEC, and the International Energy Agency (IEA) have not underestimated the growth potential of shale in the past decade. These groups are now predicting that U.S. output will decline or grow slowly over the next few years. Maybe it’s time to reevaluate.
The EIA expects U.S. output to fall from 12.2 million barrels per day in 2019 to 11.3 million b / d in 2020 and 11.1 million barrels per day in 2021. Recent data shows U.S. production on the increase, however.
The EIA reported an average yield of 11.2 million barrels per day in November – up from the 10.9 million barrels per day produced in October. The recovery of Gulf production of Mexico after a heavy hurricane season explains some of the rise, but the EIA appears to be going under shale barrels, again.
Former energy economist Philip Verleger is seeing a much stronger coalstone revival go ahead. It harvests November at 12.4 million barrels per day. It suggests that coal-mining operators are playing a possum, publicly stating that they expect small growth in output in 2021 and 2022, so the Saudi-led OPEC cartel holds up its output limits.
Regarding the EIA, “One could say that EIA officials are disparaging a rise in U.S. output to make prices rise and facilitate hedges by U.S. producers, thus helping strengthening and sustaining the business, ”Verleger recently wrote Notes at the margin column.
While most market observers believe that U.S. producers will have a hard time returning to the 2019 peak of 13 million barrels per day, that result is by no means a difficult decision.
Verleger and others expect falling costs and rising commodity prices to drive a stronger recovery in the coalstone segment. The reason is that the sector continues to reduce the cost of water breakage or “breakage”, producing more economic sources at lower prices.
Unlike traditional exploration and production, fracking is a manufacturing process that benefits from falling costs as production increases – what is known as Wright’s Law on Manufacturing Economics .
Consolidation in the industry has also led to strong companies with scale efficiencies to further reduce costs.
A recent study by the Federal Reserve Dallas found that shale companies needed less than $ 30 per barrel in most areas to cover their operating costs for existing wells. Many companies indicated that they could operate profitably in the Permian basin of West Texas for less than $ 40 per barrel, including drilling costs.
The potential for future shale growth is compounded by investor demand for companies to increase their free cash flow – the money available to repay creditors or shares and paying interest to investors – and reducing debt. Shareholders are reluctant to return to the business model with debt destroying so much capital at the time of the success of coal, which has made the U.S. E&P sector a stock market laggard.
But maybe the tide is turning. E&P shares are up 50 percent from early November on rising crude prices and Covid-19 vaccine hopes. Investors now see the sector as a good bet for outperforming the market in general in a post-pandemic world. The doors to capital markets could open faster than many think.
After generating negative free cash flow for much of the last decade, the U.S. E&P sector is offering 11 percent free cash flow yields next year – twice the overall market – if West Texas Intermediate (WTI) averages $ 50 per barrel, according to Morgan Stanley.
Capital controls explain some of the better performance, but Morgan Stanley also said “sustainable effects that significantly reduced the industry’s fair oil price to sustain production.” This indicates that the region may have a better hand on the traditional high erosion rates of shale wells.
JPMorgan Chase notes that a full – circle breakdown has gone down by $ 4 per barrel, or 8 percent, to $ 46 per barrel on average in the five bases of Midland coal oil, Delaware, Eagle Ford, Williston, and DJ from April. The investment bank will also see more running space for “increased efficiency gains” as the sector expands.
U.S. representatives are indeed scaling up as the end of a pandemic slowdown appears nearby. The number of oil rigs is now at 264 compared to its nature of 172 operating cranes in August, while service costs remain below average.
At the same time, oil prices appear to be poised to push higher in 2021 as demand recovers. The OPEC-plus alliance seems to be tied in an endless cycle of production cuts to meet the needs of its member state budget. WTI crude is already knocking on the door $ 50 per barrel.
If demand for oil returns, we could face a supply crisis after 2021 due to weak upstream investment. Stonehenge producers would greatly benefit from such a situation.
While OPEC members and their allies are sitting on huge additional capacity and high stacks of barrels in storage, it is unlikely to be enough to offset recent weak investment in new production.
Both the EMI and OPEC expect global producers to have to add up to 30 million barrels of oil to keep up with demand by 2022. That figure will climb closer to 70 million barrels of oil equivalent by 2030 .
A new joint report by the International Energy Forum and the Boston Advisory Group finds that business investment must rise over the next three years by 25 percent annually from 2020 levels to “stop the crisis. ”Based on the 2021 capital budgets of the world’s largest oil companies – that’s not happening.
Don’t destroy the big shale story yet. The final chapter – perhaps his best – is still being written.