U.S. Shale Oil Production Descent to Continue in November

The shale revolution greatly improved U.S. energy independence. But it also ushered in a flood of domestic supply that is unlikely to subside anytime soon. The breakneck in production growth continued to put pressure on prices to an extent where 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.

Shale’s Economic Viability Breaks Down

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 negative for a while, U.S. shale oil producers started feeling the heat. Even the Permian, where production had been on a tear until recently, was forced to go into negative growth amid unsustainable oil prices. The WTI benchmark may have come a long way since the depths of minus $38 a barrel in April, but oil at $40 is still unprofitable for most companies, especially the ones with huge debt burdens.

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.

Some shale companies, such as Oasis Petroleum, Lonestar Resources, Chaparral Energy, Extraction Oil & Gas, Lilis Energy, Ultra Petroleum and currently the Zacks Rank #3 (Hold) Chesapeake Energy CHKAQ were already struggling to make a profit before the coronavirus had struck and therefore filed for bankruptcy. At the prevailing crude prices of around $41 per barrel, a lot more firms are unlikely to hit cash flow breakeven.

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

Players Dial Back Production

As a response to the bearish environment, the shale fraternity — especially the ones whose production mix is heavily tilted toward crude — has scaled back drilling activity and cut their capital budgets significantly.

Per the latest edition of the EIA’s Drilling Productivity Report, crude output in these prolific shale plays is expected to decrease from 7,813 thousand barrels per day (Mbbl/d) in October to 7,692 Mbbl/d in November— levels last seen in 2018. A closer look at America’s seven most significant shale basins would reflect that November would be the seventh month in a row when oil production will shrink.

Permian Output to Wind Down Too

The Eagle Ford is set to lose 34 Mbbl/d between October and November, the maximum across all major shale basins, as the likes of Marathon Oil MRO have slashed capital spending. All other prolific formations are also set to decline in November.

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 — is seen to have contracted again after a brief comeback. Output from the United States’ number one basin is expected to fall by 17 Mbbl/d month over month to 4,365 Mbbl/d in November, indicating the fifth decline in seven months.

Oil production in this unconventional play continued to set records and reached an all-time high of around 4.8 million barrels per day in April, according to data from the Department of Energy. In fact, output from the Permian Basin currently makes up more than a third of the total U.S. crude oil production. It is primarily because of the Permian shale that the United States has turned into the world's biggest oil producer, ahead of Russia and Saudi Arabia.

However, the record-setting production has since given way to a declining profile caused by the steep drop in oil prices. Permian-based energy producers including Diamondback Energy FANG, Cimarex Energy XEC, Concho Resources CXO are all investing a lot less money into the region in 2020 in the face of low prices. Even supermajors ExxonMobil XOM and Chevron CVX are slashing production in the Permian Basin. As a proof of the moderation in activity, the rig count in the Permian Basin recently fell to a record low of 117, according to Baker Hughes.


The cutbacks in drilling activity and the production slowdown do not look to abate anytime soon unless there is a sustained increase in oil prices, chances of which look slim given the still-massive stockpiles and apprehensions regarding a second wave of coronavirus infections destroying the fledgling demand recovery.

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