Shale sector is shrinking for its own survival
Industry’s restraint means layoffs now, viability in long term
The U.S. shale industry is finally learning to live within its financial means, shrinking to survive amid an environment of depressed crude prices and Wall Street animosity toward nearly all things oil and gas.
The third quarter’s wave of earnings showed that companies are staying within budgets and planning to slice spending levels substantially more next year. Shale oil and gas production continues to rise — but at much slower rates — while drilling activity, as measured by the Baker Hughes rig count, has plunged by 25 percent over a year.
This newfound restraint by an energy sector known for overspending may lead to better long-term viability, but in the shorter term, it will mean weaker economic growth in Texas and more layoffs throughout the industry — from the Houston skyscrapers to West Texas oil fields. In a rarity for analysts and investors, energy executives were quizzed more about their plans to pay down heavy debt loads than the quality of their oil and gas acreage.
The answers suggested more cutbacks in costs, projects and workers. Already, the retreat in spending by oil and gas companies has cost Texas some 6,000 energy jobs since May, according to government statistics.
“The shale industry is clearly going through a reset,” said James West, an energy analyst with Evercore ISI in New York. “It’s ugly out there.”
The Houston company Occi
dental Petroleum, the top producer in West Texas’ Permian Basin oil field, plans to cut its 2020 capital spending by a whopping 40 percent from the combined 2019 spending of Oxy and Anadarko Petroleum, which Oxy recently acquired in a deal that boosted its debt to $40 billion. Occidental is also offering buyouts to an undisclosed number of employees as it seeks to consolidate operations and squeeze savings from the merger.
Another of the Permian’s biggest players, Midland’s Concho Resources, said it has “course-corrected” after it drilled wells too closely together, resulting in poor production and undermining the company’s reputation as an efficient Permian-centric producer. Now, Concho is spacing its wells farther apart and drilling fewer of them.
Houston’s Apache Corp., meanwhile, said it plans to cut its 2020 spending by up to 20 percent while also completing a centralizing and job-cutting plan — likely eliminating more regional and midlevel leadership roles to save another $150 million per year.
“Investors are frustrated with excessive capital investment by U.S. producers,” said Apache Chief Executive John Christmann in his earnings call. “For these and other reasons, the broad energy sector is out of favor and there is very little investor interest in publicly traded E&P companies.”
Creating ‘a lot of distress’
The pullback in capital spending, however, hasn’t yet won investors back. The S&P 500 is up 13 percent in the past 12 months, while its index tracking oil and gas producers has plunged 37 percent.
Companies need to prove that the recent restraint in spending is a permanent shift in the way they do business, not just another part of the up-and-down cycle of the oil and gas sector, said Matt Portillo, managing director of exploration and production research at Tudor, Pickering, Holt & Co., a Houston investment bank.
“It’s actually creating some optimism that we’ll have a slowdown and a healthier sector in the longer term,” Portillo said. “But, in the short term, it’s going to create a lot of distress.”
Shale producers have sliced their budgets by about 8 percent this year and should cut 15 percent or so more next year, Portillo said. Part of those reductions is due to efficiency gains achieved through automation, better seismic imaging and longer horizontal wells. Simply put, companies are producing more oil and gas with fewer drilling rigs and fracking crews.
Nearly half of the nation’s fracking horsepower has been temporarily idled or permanently scrapped, according to energy analyst estimates. Even the biggest oil field services companies such as Houston-based Halliburton, which dominates the North American fracking market, are pulling back. Halliburton recently axed 650 jobs as it said it would reduce its spending by $300 million a year.
Even the nation’s biggest energy company, Exxon Mobil, is cutting back. Exxon, whose 55 drilling rigs in the Permian Basin are more than double those of the next most active driller, has reduced the number of fracking crews it planned to deploy in the basin to 10 from 16.
Slowing oil output
U.S. oil production this year peaked at a record 12.6 million barrels per day, but the growth in output is flattening. The federal government has revised its 2020 growth to below 1 million barrels a day compared with a record 1.6 million barrels added in 2018.
Eagle Ford shale pioneer Mark Papa, who founded Houston’s EOG Resources and now leads
Denver-based Centennial Resource Development, believes that forecast is optimistic. He estimates that production will grow by only 400,000 barrels a day next year, in part because the best shale acreage is getting drained of oil and leaving less bountiful regions to be drilled.
Scott Sheffield, the CEO of Permian producer Pioneer Natural Resources, largely agrees. He also cited the strained finances of many companies that can’t afford to increase drilling activity.
“The Permian is going to slow down significantly over the next several years,” Sheffield said. “I don’t think OPEC has to worry that much more about U.S. shale growth long term.”
And yet the Permian, which accounts for more than one-third of the nation’s oil output, is better off than other U.S. shale basins, such as the Eagle Ford in South Texas and the Bakken in North Dakota. A prominent Bakken player, Whiting Petroleum, for instance, has seen its stock value fall more than 80 percent since last fall.
For some companies, it may be too late. Shale pioneer Chesapeake Energy, of Oklahoma, recently admitted in a regulatory filing that its future as a going concern is in question as it struggles with a large debt load, looming payment due dates and its stock trading below $1 per share. The company, analysts said, may have waited too long to shift its focus from cheap natural gas to more valuable crude, a costly delay amplified by Chesapeake’s untimely acquisition of WildHorse Resource Development of Houston last year just as oil prices were falling.
“Bankruptcies are going to likely accelerate in 2020,” Portillo said. “It’s going to drive further industry consolidation.”