Order in the chaos

Author Manash Goswami, Senior Reporter

Investors see US producers’ spending discipline as a welcome change that may put a floor to crude prices by limiting output growth.

The US oil shale industry enters 2019 with an uncertain business environment amid volatile crude prices and an unclear global demand outlook.

But there is a thread of order in the chaos as opposed to a few years back, in 2015-2016, when many producers focused on growth amid expectations that the price drop was temporary. That practice of growing for growth’s sake weighed on prices further, pushing them below $30/bl, leading to an even sharper pullback in plans.

This time around, the industry as a whole is as disciplined as it has ever been. Partly bowing to investor pressure to focus on returns and pare down debt, producers are overwhelmingly likely to keep spending within cash flow. Recent updates by independents such as Hess and ConocoPhillips on their 2019 plans demonstrate that.

And that underlying stability is differentiating the current bout of turbulence, giving investors and fund managers monitoring the sector’s outlook more pointers to rely on.

Offering a peek into 2019, services giants Schlumberger and Halliburton are scaling back their spending plans partly as they see muted drilling activity growth in North America.

“In North America land, the increased cost of capital and focus on aligning investments close to free cash flow has introduced more uncertainty to the outlook for both drilling and production activity,” Schlumberger’s chief executive Paal Kibsgaard said. US onshore spending is still likely to be flat or slightly down this year, even if crude prices recover to average around the same as in 2018.

Halliburton said it sees three clear themes emerging: majors, will stay the course, large independents will hold their spending steady while smaller operators make the biggest cuts. ExxonMobil and Chevron reiterated that strategy in their latest earnings update.

"In the Permian, we continue to expand and accelerate activity," ExxonMobil’s chief executive Darren Woods said. “We believe we have a unique opportunity here to bring the full strength of ExxonMobil to the development of unconventional resources.”

Large independents have mostly budgeted for $50/bl and so their spending pattern should remain flat compared to guidance. Recent announcements by ConocoPhillips, Hess and Anadarko all reflect that plan. Smaller producers, with limited access to capital, are likely to cut most aggressively if the oil price weakness persists. But conversely, this segment would also be most flexible in expanding their budgets if markets remain supportive later in the year.

Given that spending analysis, there is little doubt that US shale output growth is set to slow this year versus 2018. Continental Resources’ chief executive Harold Hamm expects growth to slow as much as 50pc at the start of the year versus 2018 if producers continue to pullback activity.

"Looks to me like anywhere between a 25-30pc cut in rig activity may occur," Hamm said. "That would be pretty tremendous."

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