Shale production in the United States is slowing quickly, according to a new report by IHS Markit. Shale production has been the main source of growth that has made the U.S. the world’s largest oil producer. U.S. production growth is expected to be 440,000 barrels per day (b/d) in 2020 before flattening in 2021, according to the new IHS Markit outlook for oil market fundamentals for 2019-2021. Modest growth should resume in 2022, it says. “Going from nearly 2 million barrels per day annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” said Raoul LeBlanc, vice president for North American unconventionals, IHS Markit. Producers are now striving to meet investors’ new focus on return of capital. Companies are facing a prolonged period of lower prices and access to financing from capital markets has become difficult, the report says. Exploration and production (E&P) companies are trading at multiples that are half to one-third what they were in 2017, and fresh debt for all but the largest shale players seems unavailable from debt markets. “The combination of closed capital markets and weak prices are pulling cash out of the system,” LeBlanc says. “Investors are imposing capital discipline on E&Ps by pushing down equity prices and pushing up the cost of capital on debt markets.” These financial trends will impact operations, the report states. With WTI prices expected, at this point, to average around $50 in 2020 and 2021, IHS Markit forecasts capital spending for onshore drilling and completions to fall by 10 percent to $102 billion this year, another 12 percent to around $90 billion in 2020 and another 8 percent to around $83 billion in 2021. This projection would be a nearly $20 billion decline in annual spending over three years. “It all represents the strongest headwinds for shale producers since the oil price collapse in 2015,” LeBlanc says. Some options for weathering the downturn will not be available this time, the report says. “Operators were able to outperform the price collapse in 2015-2016 because they were able to vastly outspend cash flow thanks to accommodative debt and equity markets, while at the same time achieving huge leaps in well productivity and capital efficiency,” LeBlanc added. This time around, capital markets are skeptical and wary, and the scope for further productivity gains is limited.” The industry retains the ability to grow rapidly under the right conditions, the report says. A $65 per barrel oil price would provide the ability to post strong volume growth while also providing meaningful returns to shareholders, IHS Markit analysis shows. The tipping point appears to be oil prices near the mid-$50s—the point where it remains viable to have both some production growth and deliver shareholder returns, the report says. “There is certainly ample inventory of high-quality wells out there,” LeBlanc said. “Shale producers are making a deliberate change to the business model in response to investor demands. The question becomes, what are the new conditions for growth? The answer is that now the trajectory of production depends almost entirely on the oil price.”
