(Bloomberg) — U.S. shale executives have finally achieved something that eluded the industry for more than a decade: the ability to turn over billions of dollars in dividends to shareholders while at the same time boosting production to tap into surging global oil demand.
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The question now is just how much the shale explorers will reinvest in fresh drilling. The stakes are high for them and the entire global economy: Drill too much and they risk triggering a damaging price war with OPEC and its allies; drill too little and oil could soar to $100 a barrel and throttle growth across the world.
The next few weeks will be telling. Executives at industry heavyweights Pioneer Natural Resources Co. and EOG Resources Inc. will be pressed to reveal details on their investment plans when they report quarterly earnings. Investors cheered the frugality adopted by management teams after the pandemic-driven collapse in demand and prices, making oil stocks the best-performing sector of 2021.
Now, with Pioneer’s cash flow expected to be large enough to fund dividends nine times its 2020 payout and EOG seen reporting record-high annual income, both companies are prepared to grow output up to 5%.
It’s a titanic shift from the first decade of the shale boom. Back then, companies drilled at a frenetic pace, driving U.S. output to record highs and provoking back-to-back price wars with the Organization of Petroleum Exporting Countries. The result: Shale companies posted a collective $200 billion in losses, which prompted Wall Street to sour on the industry. So, when the pandemic hit and prices collapsed further, companies had no choice but to restrain drilling, dismantle rigs and fire workers.
The U.S. oil industry now has a range of options for balancing growth with shareholder returns. For example, oil at the $79 mark allows oil producers to return $50 billion of cash to investors and lift output by 2 million barrels a day, according to IHS Markit. That’s equivalent to the entire annual production of Nigeria and Venezuela combined. Or, they could return $75 billion and grow daily output by just 500,000 barrels.
“Shale can and will bounce back at some price,’’ said Raoul LeBlanc, vice president for upstream at IHS Markit Ltd. With crude fetching more than $80, the industry “can give back very large sums to shareholders and start growing again.’’
Bloomberg Intelligence expects its universe of publicly traded oil companies this year to generate a record $67.1 billion of free cash flow, the pool of money left over for dividends, buybacks and debt reduction, a 33% increase from 2021. International crude topped $90 this week for the first since 2014 and the domestic benchmark isn’t far behind.
As alluring as high crude prices are to public drillers, shareholders’ appetite for cash returns is paramount. Companies boosting their payouts have helped lure investors back to the sector, casting oil companies as the top performers in the S&P 500 Index this year and adding to outsized gains in 2021.
“Public companies won’t want to risk breaking away from their current mantra of limiting output,” said Elisabeth Murphy at ESAI Energy LLC. “It has paid off for them, so why change?”
“Shale can and will bounce back at some price.” — IHS Markit’s Raoul LeBlanc
Production in the world’s largest shale field, the Permian Basin of West Texas and New Mexico, already is growing, having hit a new record in December. Total U.S. output is expected to reach 12.4 million barrels a day in 2023 — 11% more than 2021 and higher than Saudi Arabia’s current production. Most of that growth is coming from closely held shale explorers who control most of the American rig fleet and are seen boosting drilling budgets by more than 40% this year, according to Evercore ISI.
“If the U.S. is adding less than a million barrels a day you’re probably going to be in a nice sweet spot,” said Chris Duncan, an analyst at San Diego-based Brandes Investment Partners, which manages about $25 billion. Any more than that “and you’re going to have an issue with the world absorbing that.”
“The chief executives of ConocoPhillips and Occidental Petroleum Corp. both said Monday they expect U.S. crude output to increase by about 800,000 barrels a day this year.
The urge to cash in on higher prices has been so strong that it’s luring veteran oil managers out of retirement. Take Matt Gallagher, for instance. He’s a third-generation Texas oilman who formerly ran Parsley Energy Inc. before selling it for $7 billion 13 months ago.
“As things started opening back up, it was clear that there was a need for new barrels, so we’ve been in sprint mode since then,” said Gallagher, who now heads closely held Greenlake Energy Ventures LLC. “We think the timing is really good and we’ll be able to lock in healthy prices.”
Gallagher, who drilled his first well this month, is keen to emphasize that he’s learned lessons from the industry’s past failings. He’s locking in current high prices through hedging and is taking a “surgical approach” to drilling.
Developing expansion plans at his new company is “much more nimble” than at publicly traded Parsley. “Nimble is good and it’s okay for us to stop.”
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