Shale may face tough times…again

Oil prices are taking a toll on everyone, including shale producers who are slashing their Capital Expenditures (CAPEX) in dramatic ways.  With oil prices trading between $40 and $50 as of late, it is starting to impact US shale production and growth. The EIA (U.S. Energy and Information Administration) and leading investments banks have also been revising their oil price forecasts in a downward trend for the second half of 2017.

It seems like there is a consensus that the shale industry is slowing down once again.  This slowdown is being displayed in several areas: First, rig count additions have slowed down. At the start of the year, the US added 235 rigs, which was a 40% increase.  Conversely, at the end of June, only six additional oil rigs were added.

Second, there is a shortage in oilfield services as a resurgence of drilling has tightened the market for rigs, equipment, frac sands and well-completion services, giving oil field service providers the ability to raise their prices when negotiating with producers.

Finally, shale producers are responding to the weaker oil prices by slashing their CAPEX.  Most recently, Anadarko Petroleum lowered its level of investments by $300 million for the year, after reporting a net loss of $415 million in Q2. (The cuts were largely to their international program.) Another North Dakota Bakken Shale producer, Whiting Petroleum Corp, has announced it will be slashing its 2017 budget by 14%. Despite the resurgence of shale plays, a new report from Wood Mackenzie finds that even some of the largest shale players won’t be cash-flow positive until 2020.

In a recent statement, Andy McConn, principal analyst at Wood Mackenzie, said, “Producers are being incentivized by investors to grow production and we think that has the potential to oversupply the oil market, with repercussions for oil price and profitability. Value could yet be destroyed rather than created.”

Weekly estimates from the EIA are showing production is on the rise with output above 9.4 million barrels per day.

As with all things in the oil and gas industry, time is the only thing that gives us a true indication of what is going to happen, not only on shale plays, but in the industry as a whole. And as we have said before, the industry is a roller coaster ride, and what goes down eventually comes up and back again. Eventually.

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