Financiers keep pouring cash into the shale oil sector, providing producers with a path to keep U.S. output rising through the middle of the next decade.
Financiers keep pouring cash into the shale oil sector, providing producers with a path to keep U.S. output rising through the middle of the next decade. The United States is on track to deliver up to 80 percent of the world’s oil production gains through 2025, the International Energy Agency estimates, increases fueled in part by easy access to capital. Rising U.S. production is undermining OPEC’s attempts to curb global supply and boost prices, forcing the oil cartel to continue restraining output through the end of 2018.
Hedge funds and private equity firms have given producers a range of new and traditional financial levers they can pull as needed to keep shale rigs drilling, according to interviews with more than a dozen financiers, advisers and executives. The money continues to flow despite rising pressure from some investors for drillers to prioritize better profit margins over expanded production.
Producers holding land in prime fields with oil trapped in shale rock are having little trouble financing their fracking projects, said Buddy Clark, co-chairman of the energy practice group at Haynes Boone law firm in Houston. “If you’ve got the rocks, you can get the money,” he said. The IEA predicts U.S. shale oil output, now about 6.17 million barrels per day (bpd), will see an increase of 8 million bpd between 2010 and 2025. That would turn the world’s largest oil-consuming nation into a net exporter of oil. The United States already is a net exporter of natural gas.
Through the third quarter of this year, private equity firms have put $20.26 billion into energy-related deals, 36 percent more than all of last year, according to financial data provider Preqin. Initial stock offerings for U.S.-listed oil and gas firms raised $2.93 billion this year, up from $1.52 billion in 2016, according to Thomson Reuters data. Another way to finance drilling – production hedging, or contracts producers use to lock in prices on future output – also is on the rise this year. Hedging acts as insurance against price drops, letting producers drill with more certainty they can earn a profit.
Forty midsize producers tracked by researcher PetroNerds LLC hedged 45 percent of their production in the third quarter, up from 36.5 percent a year earlier. Those same companies boosted capital spending by nearly two-thirds this year.
In response to investor pressure for better profits, producers are touting efficiencies from newer well designs and their efforts to shed less productive shale acreage as evidence that they can lift returns and output at the same time. A 39 percent increase in crude prices since June also has helped shale producers deliver better returns while boosting spending. ConocoPhillips – which has sold properties in the Canadian oil sands, along with less profitable shale holdings – recently said that its capital budgets from 2018 to 2020 will average $5.5 billion annually, up from about $4.5 billion this year, because of higher production and cash flow. “This is not a supply source that is going away any time soon,” said Ryan Lance, Conoco’s chief executive, in a recent interview.