From the time the OPEC production cut deal was agreed I’ve been saying that although the market reaction proved, beyond a shadow of a doubt, that the cartel is certainly not “dead” or devoid of pricing power, the price bump will prove self-defeating up to and until capital markets finally slam shut on US producers that, were it not for easy access to funding, would have ceased to exist long ago.
The only way you can plug funding gaps created by consistently outspending cash flow is if you can tap debt/equity markets or revolvers for funding. When rates are artificially suppressed on risk free assets and higher grade debt, investors will invariably chase yield right down the credit ladder until eventually, people who might have owned Treasurys five years ago suddenly find themselves proud participants in follow-on offerings from beleaguered HY corporates. Or, visually…
Of course this access to capital allows otherwise insolvent entities to stay in business. In the context of US shale, that means companies get to sit around and wait on oil prices to rise again so they can restart the pumps. This is Matt King’s zombie creation machine in action…
Well, in a tribute to this absurd circularity, I present the following from SocGen, whose analysts note that “shale is coming back, and it’s coming back strong.”
With oil prices back above the psychological $50 threshold and the OPEC/non-OPEC agreement on the table, the market is very much focused on its compliance. Attention is also inevitably drawn to the dynamics of US shale production. Will the US recovery offset OPEC cuts? Accordingly, we review some of the key dynamics of US shale production. Specifically, we highlight 5 facts about US shale production that all point to the same underlying trend: US shale is coming back, and it’s coming back strong.
- Rig counts are increasing at an accelerating pace, and given the technological advances of the past 3 years, this should translate into significant supply.
- Decline rates for US shale wells are still steep, but initial production levels, production profiles, and ultimate recovery volumes have increased. Going forward, higher production profiles mean stronger aggregate supply.
- Preliminary US EIA estimates indicate that net new shale supply turned positive in December, the first time since March 2015. Net new supply recovered just 7 months after rig counts bottomed out and began to increase.
- The increase of drilling activity comes on the back of a large stock of drilled and uncompleted wells (DUCs). The industry is also vigorously adding to this stock, which demonstrates that the shale sector is again recovering/expanding.
- Evidence from the Bureau of Labor Statistics (BLS) is showing the oil and gas labor market is stabilizing and reversing its declining trend.