Shale drillers double down on returns over output

US shale producers dug in their heels and ramped up shareholder returns further after posting bumper second-quarter profits on the back of soaring oil prices.

Any spending increases were mostly designed to offset inflationary pressures as companies held the line on production. Instead, record cash flows were funnelled into dividend increases and share repurchases, the latter made more appealing by the sector's recent pullback on Wall Street. "We feel like one of the best values right now is investment in our own stock," Occidental Petroleum chief executive Vicki Hollub says, adding that the company sees no need to grow output for the time being.

The industry's reluctance to step up drilling is likely to lead to fresh tensions with the White House, which has urged US producers to do more to help ease a global supply crunch, although falling pump prices may offer some breathing space.

Several firms echoed recent warnings from oil service firm Halliburton that the market for hydraulic fracturing equipment remains tight. Higher costs for steel and diesel, as well as sand, chemicals and labour, prompted Pioneer Natural Resources to increase its full-year spending plan by about 7pc to $3.6bn-3.8bn. And work is already under way on contract negotiations for 2023. "I don't have any concern about Pioneer getting the equipment or services that we need or materials, but it's definitely a tighter market, so we're starting earlier," company president Richard Dealy says.

Meanwhile, Occidental is shifting $200mn in capital to its Permian operations to tackle inflation and support activity there heading into 2023. And Diamondback Energy joined in the chorus of cautionary voices, saying well costs have surged by 15pc this year, while fracking expenses are up by about 10pc.

Higher costs and supply chain woes have been cited as obstacles to being able to ramp up output even if producers wanted to. ExxonMobil, the top US oil producer with plans for Permian output growth of 25pc for a second straight year, had been looking at ways to further expand activity. "But frankly, given the tightness in the market, the availability of rigs, there's not a whole lot of opportunity to move there," chief executive Darren Woods says.

Chevron, which expects to grow its Permian output by 15pc in 2022, says development costs in the basin have fallen by around a quarter since 2019. "We expect to keep them flat this year by offsetting inflation with productivity improvements," upstream chief Jay Johnson says.

Permian pinch

Despite some forecasts for US output growth to accelerate in the second half of the year, Devon Energy chief executive Rick Muncrief says he is "not as bullish" as others, and cites flagging growth in regions such as the Bakken in North Dakota and Texas' Eagle Ford. "The Permian will continue to be the only basin that grows substantially," he predicts. "But even with the Permian, I think you'll start seeing impacts of things like the supply chain pinch." And while growth has been driven by private operators in the past year, that too may moderate. "It may not be quite as much growth as some people have forecast," Muncrief says.

Still, if oil prices remain at elevated levels, that could spur some output growth, albeit at much lower levels than in the past when the sector's heavy spending produced little in the way of returns. "I'm still very optimistic that the oil price is going to continue to march forward with probably more upside than downside," Pioneer chief executive Scott Sheffield says, citing robust post-pandemic demand, as well as supply constraints. In such a scenario, the company will focus on its long-term output growth target of 5pc, he says.

By Stephen Cunningham

Oil and gas firm supply chain inputs