Two Years Into Oil Slump, U.S. Shale Firms Are Ready to Pump More
Shale industry has proved resilient despite low prices thanks to cost cuts, efficiency improvements
By Lynn Cook and Bradley Olson
Sept. 27, 2016 5:30 a.m. ET
When oil prices began to plunge two years ago due to a global glut of crude, experts predicted U.S. shale producers would be the losers of the resulting shakeout.
But the American companies that revolutionized the oil and gas business with hydraulic fracturing and horizontal drilling are surviving the carnage largely unbowed.
Though the collapse in prices caused a wave of bankruptcies, total U.S. oil production has only fallen by about 535,000 barrels a day so far this year compared with 2015, when it averaged 9.4 million barrels, according to the latest federal data.
America. Goldman Sachs forecasts the U.S. will be pumping an additional 600,000 to 700,000 barrels of oil a day by the end of next year—making up for every drop lost in the bust.
Few predicted that in the fall of 2014, when Saudi Arabia signaled that it wouldn’t curb its output to put a floor under crude prices. Oil pundits concluded that a brutal culling would force higher-cost players known as marginal producers—a group that includes shale drillers—out of the market.
But the greatest consequence of the Saudi decision and subsequent price drop is that it has delayed costly oil megaprojects, from deep-water platforms off Angola to oil-sands mines in Canada.
Even if members of the Organization of the Petroleum Exporting Countries, which are meeting this week in Algiers, manage to strike a deal to cut oil production later this year, U.S. producers will step into that void.
“The U.S. isn’t the marginal barrel but the most flexible,” said R.T. Dukes, an analyst at Wood Mackenzie. “We’ll be the fastest to snap back.”
More than 100 North American energy producers have declared bankruptcy during this downturn, but even companies working through chapter 11 keep pumping oil and gas. Many exit bankruptcy stronger thanks to a balance sheet that has been wiped clean. SandRidge Energy Inc., SDOCQ 5.92 % which filed in May, will exit next month after erasing nearly $3.7 billion in debt.
Many shale operators are still struggling at current prices, drilling at a loss and tapping Wall Street for new infusions of cash. But the strongest producers, including EOG Resources Inc. EOG 0.79 % and Continental Resources Inc., CLR -0.11 % soon will be able to generate enough money to pay for new investments and dividends—as well as boost production—even at low prices, analysts say.
U.S. production began inching up in July, shortly after oil prices rebounded to $50-a-barrel territory. Producers quickly put 100 rigs back to work this summer.
The ramp-up spooked the market, sending oil prices plunging 20% back toward $40. They have recently rebounded to about $45.
The gyrations will continue for months as shale producers go back to work, said Eric Lee, an analyst at Citibank, who predicts crude will stabilize around $60 a barrel in late 2017.
Though oil storage tanks around the world are brimming, new sources will be needed soon because older oil fields decline by 5% a year and global demand continues to rise 1.2% a year. Demand will break through the 100 million barrel-a-day mark by 2020, according to the International Energy Agency.
The looming gap between supply and demand is one reason the easy money that fueled the American drilling boom hasn’t dried up, said Lewis Hart, senior vice president of corporate advisory and banking for Brown Brothers Harriman in New York.
Even as banks and other traditional lenders tighten their purse strings, alternative sources of money are cropping up, from private-equity funds to distressed-debt specialists.
“The very existence of that capital means prices are likely to be lower for longer, because it compounds the supply problem,” Mr. Hart said.
Jesse Thompson, an economist with the Federal Reserve Bank of Dallas, said this oil bust is different from the downturn that crippled American producers in the 1980s.
Back then, Saudi Arabia initially shut down production as it tried to put a floor under prices, then changed course and began selling crude into an already glutted market. By 1986, the world’s oil supply capacity was 20% higher than demand, Mr. Thompson said. He estimates that today, the world is oversupplied by about 1%.
A big reason U.S. oil production has been so resilient is that U.S. producers found ways to cut costs and enhance efficiencies during the lean years. Those innovations are now poised to propel the industry’s resurrection.
In May, Halliburton Co. HAL -0.24 % helped tap the longest shale well on record—8,500 feet deep and another 18,544 feet long—for Eclipse Resources Corp. ECR 3.49 % in Ohio, 130 miles south of Cleveland.
That well was fracked—the process of injecting water, chemicals and sand to coax out oil and gas—an extraordinary 124 times. Typical shale wells are fracked between 30 and 40 times, up from just nine fracks in 2011 at the start of the oil boom, according to Drillinginfo, a data provider for the energy industry.
To put that engineering feat in Manhattan perspective, that is equivalent to burrowing down to the depth of nearly five World Trade Centers at One World Trade Center, turning 90 degrees and drilling underground 3.5 miles to Grand Central station. Eclipse saved 30% by supersizing the well, said Chief Operating Officer Tom Liberatore.
The industry’s cost-cutting has been painful for many. Nearly 160,000 energy employees have been laid off around the country, according to the latest tally by Graves & Co.
Even so, plenty of companies that didn’t accumulate debt or spend beyond their means during the boom years have the resources to take advantage of financial fallout from the downturn.
Albert Huddleston, founder and managing partner of Aethon Energy, said the Dallas-based producer spent more than $600 million on distressed oil-and-gas properties from Wyoming to Louisiana since prices started to fall in 2014.
“Can you kill off shale? The answer is no,” he said.
—Erin Ailworth contributed to this article.
