The U.S. shale industry continues to show signs of slowing down, with production declining in major shale basins outside of the Permian.
Financing stress has plagued the shale sector for quite some time, but investors continue to bail on oil and gas stocks. The FT points out that the energy sector is now underperforming the S&P 500 “by the biggest margin since the Japanese attack on Pearl Harbor in December 1941.” In other words, it has been nearly 80 years since U.S. oil and gas stocks have performed so badly relative to the rest of the market.
The pressure is starting to have an impact on drilling and production. The latest EIA Drilling Productivity Report shows that production in all major shale basins outside of the Permian have started to decline, and even the Permian’s expected growth for March is a fraction of the growth rates seen during the heady days of 2018.
Even still, the effects of the coronavirus have likely not yet filtered through to the production data. Shifts in drilling activity and rig counts often take several months after a major change in prices, so there could be another dip in the months ahead. With WTI drifting back down to $50 per barrel, many shale companies are in unprofitable territory.
Drillers are “highly susceptible to price signals,” as JBC Energy put it in report in mid-February. The firm cut its shale supply growth forecast to 760,000 bpd in 2020, down 120,000 bpd previously. “The currently suppressed price environment, which is not expected to disappear anytime soon, makes it more difficult for completion rates to achieve their previously expected recovery,” the firm said.
OPEC+’s perennial problem of trying to balance the oil market continues, but after years of battling U.S. shale, the problem is no longer about the Permian or the Bakken. “Over the past five years, US oil output growth has been the main disruptor of OPEC’s market balancing,” Standard Chartered wrote in a note. “That is not the case in 2020; demand is the main driver of imbalances, while US output growth is slowing.”
Standard Chartered put U.S. shale growth at 0.6 million barrels per day (mb/d) this year, and 0.55 mb/d in 2021, “both less than half 2019’s growth of 1.237 mb/d.”
The investment bank went on: “The largest slowdown is expected in Texas, where we forecast output growth of 309kb/d in 2020, down from 644kb/d in 2019.” Analysts at the bank said that the sharp slowdown is no longer a minority view among analysts and investors, but is now the “consensus” view, and that “the indicators point to further growth disappointments.”
It is worth noting that these growth figures are annual numbers, so the 2020 average should increase relative to 2019 even if output growth completely stalls out going forward. The annual numbers obscure a significant slowdown that began months ago and continues to unfold. Morgan Stanley pointed out that some of the largest shale drillers hiked dividends, which the investment bank took as a sign that oil production would slow. Hoping to staunch the bleeding as investors flee the energy sector, large E&Ps like Devon Energy and Pioneer Natural Resources increased their dividends. “We view the shift toward higher dividends and return of cash as constructive not only for the sector…but also for the macro as it should limit upside to US production growth should oil prices rise,” the investment bank wrote.
Meanwhile, some of the worst pain is being felt by gas drillers. U.S. natural gas prices are below $2/MMBtu, where few gas companies can turn a profit. “I have a hard time rationalizing why industry is growing into the market today,” Cabot Oil & Gas Chairman and CEO Dan Dinges told analysts on the company’s fourth-quarter 2019 earnings call Friday. “I do think … rationalization is going to have to prevail in this market that’s not sustainable, and the balance sheets are not sustainable out there.” Cabot plans on idling one of its rigs in March and says that production will decline by 3 percent in the first quarter, relative to the fourth quarter.
The EIA expects Appalachian shale gas production to continue to decline, falling by 200 million cubic feet per day in March.