This year’s rally in oil prices brings back an all-too-familiar question for the oil market and the OPEC+ group: Will U.S. shale come back faster than expected to ruin the alliance’s efforts to manage supply?
Most publicly-traded U.S. shale firms continue to vow strict capital discipline. They promise that any excess cash flow will go to additional payouts to shareholders, who have seen years of meager returns while the shale patch was chasing drilling and production records.
However, there is a group of shale producers who could spoil the OPEC+ plans for oil market management again, producing more than the market and forecasters currently expect.
This is the group of the smaller privately held oil firms benefiting from higher oil prices as their primary way of generating cash is increased production. Those closely held producers also benefit from the fact that they are not punished by the stock market or investors for their choice to ramp up drilling activity while large listed firms are scaling back capital spending and idling rigs.
Signs have started to emerge that some private shale operators that have boosted production over the past year will continue to do so in the coming months.
More than expected U.S. production coming to the market could derail the current forecasts for American oil supply and undermine the efforts of the OPEC+ alliance to control a large part of the global oil supply while demand is recovering from the pandemic shock.
For example, privately held DoublePoint Energy looks to raise its production to over 100,000 barrels per day (bpd) in the coming months, after having doubled output to 80,000 bpd over the past year.
“The publics are under a lot pressure to be disciplined with the capital they spend,” DoublePoint Energy’s co-chief executive Cody Campbell told Bloomberg in a recent interview.
“They don’t have the freedom to go after returns like we can,” Campbell added.
If more of the ‘smaller guys’ decide to take advantage of the higher oil prices and boost production to generate more returns, they could upend expectations of how much oil the U.S. would pump this year.
Currently, OPEC itself sees U.S. crude oil production for 2021 at 11.2 million bpd, slightly down from an estimated 11.28 million bpd output for 2020. In its latest Monthly Oil Market Report (MOMR) for February, the cartel actually revised down its 2021 forecast for U.S. oil production by 210,000 bpd and now expects a 70,000-bpd annual decline from 2020, as continued capital expenditure discipline is “expected to weigh on production prospects in 2021.”
Larger listed U.S. producers are concerned that some drillers would break promises of output restraint.
“There are going to be bad actors [who pursue] growth for growth’s sake,” Matthew Gallagher, an executive at Pioneer Natural Resources, told the Financial Times in January.
Pioneer Natural Resources itself will look to limit production growth to an average 5 percent over the long term, CEO Scott Sheffield said on the Q4 earnings call last week. Moreover, Pioneer expects to return up to 75 percent of its annual free cash flow to shareholders after the base dividend is paid, Sheffield noted. This will be returned in the form of variable dividends paid out quarterly the following year, the executive said.
While Pioneer and other major listed shale players seem to be heeding investors’ calls for higher returns to shareholders, the smaller closely held operators are not promising anything other than chasing higher returns on their investment, which is being generated by more oil production.
U.S. shale production as a whole is unlikely to return to the levels before the pandemic, Occidental’s CEO Vicki Hollub said on the CERAWeek by IHS Markit on Tuesday.
“The severe drop in activity in the U.S. along with the high decline rates of shale and the pressure from investment community to maintain discipline instead of growth means in my view that shale will not get back to where it was in the U.S.,” Hollub said, as carried by Reuters.
Shale production may never return to pre-COVID levels, but privately held drillers could surprise to the upside major forecasters, the oil market, and even OPEC.