CEOS of U.S. shale pledging restraint amid oil rally
‘Flat is the new growth’
The new boss of Devon Energy Corp. said he won’t let this week’s rally in oil prices tempt him to return to the days of rampant production growth at any cost, becoming the latest shale executive to call for restraint.
“I have a hard time seeing the need for U. S. producers over the next several years to get back to double- digit growth,” chief executive Rick Muncrief said in an interview. “For this management team, if we really think about 2021, let’s keep it flat.”
Muncrief ’ s comments echo those of Scott Sheffield, who heads up Pioneer Natural Resources Co., and Occidental Petroleum Corp.’s Vicki Hollub, after Saudi Arabia’s surprise plan to cut production in the next two months sent oil prices surging. All three executives urged caution, mindful of the industry carnage caused by years of unchecked growth that burned through cash and left investors with little to show for even before the pandemic took its toll.
Devon, which closed its acquisition of WPX Energy Inc. on Thursday, is planning to keep output flat compared with fourth- quarter levels, according to Muncrief, who previously ran WPX for six years. Pioneer is sticking with its initial production growth target of just five per cent, while Hollub said her main focus is debt reduction.
“Flat is the new growth right now,” Doug Suttles, CEO of Ovintiv Inc., another driller, told an investor webcast hosted by Goldman Sachs Group Inc. on Thursday. “We need to see the global markets recover and our industry needs to show discipline and that’s what we’re going to do.”
U. S. crude production is currently hovering around 11 million barrels a day, about 12 per cent of global demand last year, and two million barrels below its peak at the beginning of 2020. Shale operators’ financial weakness and newfound pledges for discipline suggest that lost production, equivalent to the entire output of the U. S. Gulf of Mexico, won’t come back anytime soon.
But the risk for OPEC and its allies is that shale executives see this year’s price boost as an opportunity to return to their old high-growth, drill- and- be- damned ways. Unlike conventional fields that take years to get up and running, shale producers can drill and start pumping oil within weeks, allowing them to quickly ramp output up or down.
Rystad Energy, for instance, said Thursday it sees a “surge” in U. S. shale activity this year driven by a rebound in prices over the second half of last year and Saudi’s “gift” to cut production.
“This increased activity has already started to manifest itself, with rig activity for tight oil up 60 per cent since the low point in August last year,” said Espen Erlingsen, head of upstream research at Rystad.
One way shale producers have been encouraged to shore up finances is through consolidation. Last year, those calls seemed to finally be answered, with a wave of acquisitions among independent drillers. Both Devon and Pioneer announced major deals to buy smaller peers in the final months of 2020.
For Devon, just keeping production flat will require the company to drill and frack new wells at a cost of around US$ 1.7 billion in socalled maintenance capital, said Muncrief. The company is still finalizing its 2021 plan and intends to have updated estimates in the coming weeks.
But nothing will change as a result of this week’s rally, which saw U. S. crude benchmark prices jump above US$ 50 a barrel for the first time since February.
“What you’ll see is cash flows potentially strengthen if commodity prices stay in this range or potentially strengthen further,” he said. “But it’s not going to change our activity level.”