U.S. Oil Production Growth Heading for a “Major Slowdown,” as Capital Discipline and Weak Prices Play Out, IHS Markit Says
November 06 2019 - 12:01AM
Business Wire
Shale production—the engine driving rapid growth in recent
years—is entering a “new era of moderation” in growth as producers
focus on greater capital discipline and shareholder returns
U.S. shale production—the chief source of rapid growth that made
the United States the world’s largest oil producer—is slowing down
fast, says a new report by IHS Markit, (NYSE: INFO), a world leader
in critical information, analytics and solutions.
The new IHS Markit outlook for oil market fundamentals for
2019-2021 expects total U.S. production growth to be 440,000
barrels per day (b/d) in 2020 before essentially flattening out in
2021. Modest growth is expected to resume in 2022. But those
volumes would still be in stark contrast to the boom levels of
recent years, said Raoul LeBlanc, vice president for North American
uncoventionals, IHS Markit.
“Going from nearly 2 million barrels per day annual growth in
2018, an all-time global record, to essentially no growth by 2021
makes it pretty clear that this is a new era of moderation for
shale producers,” said LeBlanc. “This is a dramatic shift after
several years where annual growth of more than one million barrels
per day was the norm.”
The key challenge for producers now is to meet investors’ new
focus on return of capital. This comes at a time when companies are
facing a prolonged period of lower prices and when access to
financing from capital markets has become difficult, the report
says. Exploration and production (E&P) companies are trading at
multiples that are half to one-third of what they were in 2017, and
debt markets are unwilling to provide fresh debt for all but the
largest shale players.
“The combination of closed capital markets and weak prices are
pulling cash out of the system,” LeBlanc says. “Investors are
imposing capital discipline on E&P’s by pushing down equity
prices and pushing up the cost of capital on debt markets.”
These financial trends will impact operations in turn. With WTI
prices expected, at this point, to average around $50 in 2020 and
2021, IHS Markit forecasts capital spending for onshore drilling
and completions to fall by 10% to $102 billion this year, another
12% to around $90 billion in 2020 and another 8% to around $83
billion in 2021—a nearly $20 billion decline in annual spending
over just three years.
“It all represents the strongest headwinds for shale producers
since the oil price collapse in 2015,” LeBlanc says.
Aggravating the situation is that some options for weathering
the storm that worked then will not be available this time, the
report says.
“Operators were able to outperform the price collapse in
2015-2016 because they were able to vastly outspend cash flow
thanks to accommodative debt and equity markets, while at the same
time achieving huge leaps in well productivity and capital
efficiency,” LeBlanc added. This time around, capital markets are
skeptical and wary, and the scope for further productivity gains is
limited.”
Nevertheless, the industry retains the ability to still grow
rapidly under the right conditions, the report says. The IHS Markit
analysis shows that a $65 per barrel oil price would provide the
ability to post strong volume growth while also providing
meaningful returns to shareholders. The crucial tipping point for
this new shale era appears to be oil prices somewhere near the
mid-$50s—the point where it remains viable to have both some
production growth and deliver shareholder returns, the report
says.
“There is certainly ample inventory of high-quality wells out
there,” LeBlanc said. “Shale producers are making a deliberate
change to the business model in response to investor demands. The
question becomes, what are the new conditions for growth? The
answer is that now the trajectory of production depends almost
entirely on the oil price.”
About IHS Markit
(www.ihsmarkit.com) IHS Markit (NYSE: INFO) is a world leader in
critical information, analytics and solutions for the major
industries and markets that drive economies worldwide. The company
delivers next-generation information, analytics and solutions to
customers in business, finance and government, improving their
operational efficiency and providing deep insights that lead to
well-informed, confident decisions. IHS Markit has more than 50,000
business and government customers, including 80 percent of the
Fortune Global 500 and the world’s leading financial institutions.
Headquartered in London, IHS Markit is committed to sustainable,
profitable growth.
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Jeff Marn IHS Markit +1 202 463 8213 Jeff.marn@ihsmarkit.com
Press Team +1 303 858 6417 press@ihsmarkit.com
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