US Shale Defy Calls To Boost Output As They Funnel Profits To Shareholders
US shale is still acting with restraint in terms of production growth despite President Biden’s calls to increase supplies to squash energy prices that were driven up due to soaring demand, decarbonization efforts, lack of refinery capacity, limited spare capacity, and, of course, geopolitical uncertainty surrounding Russia’s invasion of Ukraine.
ConocoPhillips, Pioneer Natural Resources, and Devon Energy recorded soaring profits in the second quarter, though many of these top shale oil and gas producers were reluctant to boost capital spending to increase output despite elevated prices for crude, according to Financial Times.
Executives of these companies are under pressure from Wall Street to return record profits in the form of dividends and share buybacks to investors rather than increasing capital expenditures to boost production. It comes after years of burning cash and issuing equity to survive the multiple boom-bust cycles that paralyzed the shale industry.
Then there was the chaos of slumping crude oil demand in the virus pandemic lockdowns, and WTI plunged below $0 per barrel for the first time. US shale drillers have rearranged their priorities from exceptional growth rates to stable rates that attempt to prevent another dark winter. The capital that would typically be deployed for drilling is being rerouted to shareholders:
“Unless we have shareholders that come in and say, look, we absolutely — we do not like these big dividends. We do not like your share repurchase program. We want you to go back to a growth model,” Rick Muncrief, chief executive of Devon Energy, a top shale producer, told investors. “Until we see that, I see no reason to change our strategy.”
Other shale executives reiterated Muncrief’s message as they all remain defiant to the Biden administration’s request to increase production. In response, Biden and other western politicians have slammed shale companies’ decision not to increase output.
According to the Energy Information Administration, US crude production is around 12.1 million barrels a day. Production levels remain 800,000b/d from the pre-coronavirus pandemic highs.
Occidental Petroleum is another shale company concentrating on debt repayments and cleaning up its balance sheet than expanding production.
“We don’t feel the need to grow production,” said the company’s chief executive Vicki Hollub. “We feel like one of the best values right now is an investment in our own stock.” Warren Buffett’s Berkshire Hathaway has bought a 20% stake in the company, helping equity value to double over the past year.
“This year has marked a reversal in the shale industry’s fortunes after hefty losses during the pandemic, although fears of a recession have once again cast a cloud over its prospects,” FT said.
Shale also has another problem: its inability to raise production due to bottlenecks in the industry.
Last month, Halliburton Co.’s CEO Jeff Miller warned oilfield equipment market is so tight that oil explorers are limited to the amount of production they can bring online.
Miller said oil companies don’t have enough fracking equipment for newly leased wells this year. He said diesel-powered and electric equipment are in short supply, “making it almost impossible to add incremental capacity this year.”
A similar message was conveyed by Exxon Mobil, whose CEO said that global oil markets might remain tight for another three to five years primarily because of a lack of investment since the pandemic began.
“Availability of frac fleets is one of main bottlenecks impeding oil and natural as production growth for the next 18 months,” Robert Drummond, chief executive officer of fracking firm NexTier Oilfield Solutions, recently told Reuters.
… this bottleneck is due to several years of divestment and decarbonization — making the days of shale roaring back to life over for now.
So shale execs funnel profits back to shareholders instead of boosting production — and even if they were to increase output, there are severe bottlenecks in the equipment space that inhibits bringing on new rigs.
Making matters worse for the Biden administration, OPEC+ only increased production last week by a measly 100k barrel per day in output for September – considerably less than the 300-400k increase expected by many. This means OPEC+ has limited spare capacity, so crude prices should stay elevated overall.