U.S. Shale Oil Output Rising, Permian to Hit 1-Year High

Operators in the Permian Basin — the lowest-cost shale region— are gradually looking to boost output. Experts say that it’s cheaper to drill and complete oil wells in the Permian Basin, as compared to most other major fields. Moreover, there are certain parts of the shale play whose well-returns are the best in the U.S. Permian’s attractive economics. This means that producers can make money and sustain growth there at the current price. According to estimates, the average breakeven prices in most of the Permian well locations is below $50 per barrel — the lowest in the United States.

However, the bulk of the exploration and production companies in the other regions are showing little sign of straying from their restrained drilling programs.

Abundant Supply Puts Downward Pressure on Oil Prices

The shale revolution greatly improved U.S. energy independence. But it also ushered in a flood of domestic supply that led to lower prices.

The breakneck in production growth continued to put pressure on prices to an extent wherein the majority of oil plays worked on razor-thin margins. There was always a concern that the frenzied activity out of the shale region was economically unsustainable in the long term given the massive capital burn, depressed returns and huge debts.

Spread of Coronavirus Triggers Further Panic

Then came the coronavirus pandemic, the subsequent hit to global oil demand and with it, the collapse of prices. With WTI crude futures falling below $30, $20, $10 and even going below zero for a while, U.S. shale oil producers started feeling the heat.

A wave of bankruptcies followed as prices weren’t enough for them to survive the long term. Even the Permian, where production had been on a tear until recently, was forced to go into negative growth amid unsustainable oil realizations.

Oil between $45 and $50 a barrel is considered the break-even point for most shale operators, which means that they need crude prices of at least $45 to balance their operating cash flows with capital expenditure. Consequently, for the major part of 2020, oil prices were too low for the beleaguered firms — especially the highly leveraged ones — to continue producing.

Some shale companies such as Whiting Petroleum WLL and Oasis Petroleum OAS were already struggling to make a profit before the coronavirus had struck and therefore had to go the Chapter 11 route to restructure their debt and come back with a viable capital structure.

Shale Output Showing Signs of Revival

The WTI benchmark has come a long way since the depths of minus $38 a barrel in April but most companies are in no hurry to boost output. Finally, learning their lesson, the shale operators are primarily focusing on improving cost and increasing free cash flow rather than looking at higher production. While oil at around $60 is profitable for almost all shale entities, the industry, for its part, is sticking to the mantra of capital discipline and sustainable production.

Nevertheless, drillers in the unconventional oilfields are slowly showing some early signs of recuperation on the back of higher realizations. Per the latest edition of the EIA’s Drilling Productivity Report, crude output in these prolific shale plays is expected to increase from 7,600 thousand barrels per day (Mbbl/d) in April to 7,613 Mbbl/d in May.

Permian Leads the Way

In particular, production in America’s biggest oil field — Permian Basin in the western part of Texas and the south-eastern part of New Mexico — continues its comeback. Output from the United States’ number one basin is expected to rise by 52 Mbbl/d month over month to 4,466 Mbbl/d in May, indicating the third-straight monthly increase and the maximum since April 2020. With oil prices having rebounded from the coronavirus-induced lows of a year ago to more than $60 per barrel now, the likes of Matador Resources MTDR, EOG Resources EOG and Diamondback Energy FANG — all carrying a Zacks Rank #1 (Strong Buy) — are among the few that have announced plans to increase production.

You can see the complete list of today’s Zacks #1 Rank stocks here.

As a proof of the improvement in activity, the rig count in the Permian Basin has risen to 223 from a record low of 116 in August, according to Baker Hughes.

While the Permian output is staging a recovery, most other top fields are still on a downward path. The Eagle Ford and Bakken may lose 9 Mbbl/d and 12 Mbbl/d, respectively, between April and May, as the likes of Marathon Oil MRO and Hess Corporation HES stress on capital efficiency. Most other formations are also set to decline in May.

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