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Page added on December 22, 2016

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U.S. Shale Is Now Cash Flow Neutral

Production

Oil prices are probably already high enough to spark a rebound in shale production.

The IEA says that in the third quarter of 2016, the U.S. shale industry became cash flow neutral for the first time ever. That isn’t a typo. For years, the drilling boom was done with a lot of debt, and the revenues earned from steadily higher levels of output were not enough to cover the cost of drilling, even when oil prices traded above $100 per barrel in the go-go drilling days between 2011 and 2014. Even when U.S. oil production hit a peak at 9.7 million barrels per day in the second quarter of 2015, the industry did not break even. Indeed, shale companies were coming off of one of their worst quarters in terms of cash flow in recent history.

That all changed around the middle of 2015 when the most indebted and high-cost producers went out of business and consolidation began to take hold. E&P companies began cutting costs, laying off workers, squeezing their suppliers and deferring projects that no longer made sense.

By 2016, oil companies large and small had shed a lot of that extra fat, running leaner than at any point in the last few years. By the third quarter, oil prices had climbed back to above $40 and traded at around $50 per barrel for some time, replenishing some lost revenue. That was enough to make the industry cash flow neutral for the first time in its history.

IMG URL: http://cdn.oilprice.com//images/tinymce/CUN1220.png

That suggests that moving forward, the shale industry could move into cash flow positive territory. Oil prices seem to be trading safely above $50 per barrel for the time being, and OPEC cuts could induce more price gains. The industry is now focusing on shale plays that have lower breakeven prices, namely, the Permian Basin and some parts of the Bakken. That has companies like Concho Resources, Murphy Oil, Devon Energy, Pioneer Natural Resources and EOG Resources all stepping up their spending levels heading into 2017.

Wood Mackenzie suggests that $55 per barrel is a sweet spot for the oil and gas industry to rebound, a level that is only slightly above today’s prices. At $55 per barrel, the shale industry is cash flow positive and will grow accordingly. “If we stay (at $55 a barrel), the world’s biggest oil companies start to make money again. If we go back down to $50 (or lower) in 2017…then those companies are in the negative territory and they go back into survival mode where they have been in the last two years,” Angus Rodger, WoodMac’s research director for upstream oil and gas, said in a report. He estimates that OPEC’s cuts could succeed in pushing oil prices sustainably up to $55 per barrel. Even taking into account some cheating, WoodMac concludes that a 75 percent compliance rate with the promised cuts would get the markets to that price level.

Still, the seeds of disappoint have already been sown – it is just a question of whether or not they will sprout. The U.S. dollar is at its strongest level in nearly a decade, which will weigh on global crude oil demand. Also, hedge funds and other money managers have staked out the most bullish position on oil futures in more than two years. That has succeeded in running up prices this month, but it also sets up the market for downside risk. Should data emerge in the coming months that some OPEC members are cheating, the net-long positions could unwind. Those liquidations tend to happen quickly, so a sharp fall in oil prices is not out of the question.

“If confidence around the compliance with cuts wavers, the market will necessarily correct lower, considering that it also faces the twin headwinds of resilient U.S. production and a stronger dollar environment as the Fed begins to hike rates,” Harry Tchilinguirian, an analyst with BNP Paribas, told S&P Global Platts.

And while the financial markets present risk, the physical market is also up in the air. Of course, OPEC cheating is a possibility. But with U.S. shale producers already stepping up drilling, production could come back quicker than many expect. Weekly EIA data shows gains of nearly 300,000 bpd since the end of summer. On top of that, disrupted output from Libya and Nigeria – two countries not subjected to the OPEC cuts – could begin to come back. An oil tanker docked at Libya’s largest oil export terminal, Es Sider, this week, was the first tanker to load up Libyan oil from that terminal in more than two years. Libya hopes to add another 300,000 bpd in output in 2017 after adding as much in 2016.

Even with those negative risks in mind, the shale industry is getting back to work. If oil prices can stay roughly where they are right now, the industry could become cash flow positive for the first time ever next year.

 

By Nick Cunningham of Oilprice.com



18 Comments on "U.S. Shale Is Now Cash Flow Neutral"

  1. penury on Thu, 22nd Dec 2016 4:24 pm 

    The oil industry (at least the extraction portion) would appear to have quite a pile of debt to work thru. But like all U.S. Corporations money was cheap so borrowing was rampant. If interest rates increase then these oil companies may face problems and a Fed Reserve bailout may not be possible.

  2. Truth Has A Liberal Bias on Thu, 22nd Dec 2016 6:01 pm 

    Check out this fucking retard

    http://www.news-sentinel.com/opinion/your-voice/Stockpiling-for-major-disasters-is-a-waste-of-time

  3. makati1 on Thu, 22nd Dec 2016 6:31 pm 

    Thanks for the ref, Truth. I needed a chuckle.

    “My critique of food storage, gold hoarding and the entire “prepper” phenomenon is grounded in both economics and scripture.”

    Economics
    Scripture

    Both are faith based voodoo cults with ZERO credibility.

    This is another weirdo peddling bullshit for $$$$.

  4. Go Speed Racer on Thu, 22nd Dec 2016 7:26 pm 

    Why dost thee not believeth? Thou shalt be
    banished to the fires of hell, unless thou giveth me
    enough money to fill up my plate and buyeth me
    thine road hogging recreational vehicle with thine
    optional satellite dish and biggeth screen.

  5. GregT on Thu, 22nd Dec 2016 8:52 pm 

    “Stockpiling for major disasters is a waste of time”

    Tyler Watts is director of the Institute for Economic Education at East Texas Baptist University.

    Why do I not find that the least bit surprising.

  6. antaris on Thu, 22nd Dec 2016 10:49 pm 

    Bless you Sunday, screw you Monday.

  7. Dredd on Fri, 23rd Dec 2016 5:08 am 

    Peak Cash (Ring of Fire).

  8. Davy on Fri, 23rd Dec 2016 5:28 am 

    Stockpiling is a physical investment in something close to home like food and things related to security. We can easily say investing in an retirement account may be a waste of time. Both have conditions for there to be a reward. One has a stable growing economy and the other a declining and decaying one.

    Probably a good idea to do a little of both. Probably be a good idea not to have an asshole attitude about it either. People who know for sure and want everyone else to know they know are those who generally eventually crash and burn.

    There are basics of risk management in both investing, insurance, and prepping. Prepping has a bad reputation but that is not becuase of the activity but the people that practice prepping. Many are odd characters with strange lifestyles. I would say now more than ever include some basic prepping strategies in your life. The extent you take it to should depend on your situation and goals just like investing in retirement.

    The most important choice is location. Once you are set with where your home will be then it is about a broad range of activities. It is mental and physical. It is social and private. The wonderful thing about prepping is the range of investment. For me it is a way of life at all levels. I am not here to sell my life on you. I am a special case in many ways. I am urging those who can to first study the discipline. Determine what you can do or if you should do anything. Everyone can do something but not everyone should go beyond basics. I say this becuase if you jump into this without proper education you are setting yourself up for failure. You may be less prepared. Done properly you will alter your personality to the realities of prepping. It can be a way of life or just another insurance policy. It can be a major reorientation or just another effort to learn new skills and good attitudes.

    Done properly you will end up localizing and consolidating around a more sustainable foundation. You will grow closer as a family. Your values will humanize. Society today has no direction you will have a direction. This is the default payoff to these activities. You will find increased security maybe not much but what you do realize will be real and tangible.

    The biggest benefit are from within with confidence and direction. The skills and knowledge you will seek to acquire are solid. You will be seeking the truth ultimately becuase is it not our deepest instinct to survive. If you are the patriarch you will be finding your manhood in the activity of protecting your friends and family.

    This is something you can open and close like a book. There are no set rules just life. Just start it and incorporate it into your decision process. Most can’t leave the status quo that bases life’s choices only on traditional progress. Most can adapt their choices to include a healthy dose of skepticism for a way of life that is increasingly flawed. This life is increasingly hollow and deceptive. There are many things in life that are a waste time but learning and growing in the pursuit of security is not one. If done properly a disaster is not important it is who and what you have become.

  9. Cloggie on Fri, 23rd Dec 2016 5:43 am 

    My pension plan:

    – solar panels, will give me electricity for the rest of my life (together with grid)
    – paid off house + 100 m2 garden + greenhouse; sufficient for 100% food (minus fat)
    – freezers to store the garden produce in and have food all year round
    – small generator to keep freezers going in case grid goes down
    – 2 seasons worth of wood (still looking for suitable small hearth), have open fire place with lousy 15% heat efficiency
    – no debt

    That’s all realized.

    Future investment opportunities replacing pension plan:
    – solar collectors for some heat, perhaps together with heat pump
    – glazing over my garden terrace to capture additional sun rays

    When that is realized, excess funds will be used for bullion, mostly silver.

  10. Davy on Fri, 23rd Dec 2016 5:51 am 

    Good job Clog! IMA being in Northern Europe doesn’t hurt.

  11. Midnight Oil on Fri, 23rd Dec 2016 7:15 am 

    You all are dreaming ….Little House on the Prairie was just a make believe TV show.
    Well, suppose you ain’t hurting the situation, cause it can’t go no worse.

  12. Davy on Fri, 23rd Dec 2016 7:28 am 

    Dreaming? Modern life is part fantasy and part freak show. The status quo is an exercise in mental health. Those most adapted are often the most prone to neurosis. I say pick your poison and that is about the best it gets.

  13. Cloud9 on Fri, 23rd Dec 2016 7:43 am 

    I can see how this would work. A couple of guys go out and sell a drilling scheme in a shale formation. A bunch of investors jump on board. The drilling commences. The guys selling the scheme get theirs. The drilling guys get theirs. The wells produce hot and heavy and then go into decline. The investors lose their shirts. The leases revert back to the original owners or are sold for a fraction of a cent on a dollar. And at the end of the day, the new owners actually make some money for a while. No mention of course of the trillion dollar investment that simply evaporated killing pension funds, banks and insurance companies.

  14. Twocats on Fri, 23rd Dec 2016 8:03 am 

    They also dropped Capex to record lows and therefore might be cruising off legacy production. How long can that last? Well it just needs to last long enough to hook some investors.

  15. joe on Fri, 23rd Dec 2016 8:09 am 

    Being cash flow neutral after almost 10 years of almost zero % interest rates is not admirable. If rates went up to say 4 or 6% shale would be finished, or so this article implies.
    My own little theory is that Trump gives them massive tax breaks to compensate for the coming rate hikes.

  16. JuanP on Fri, 23rd Dec 2016 8:46 am 

    This is a great investment opportunity! Please buy stock in these companies! The more stocks you buy the longer and bigger the boom will be. If you don’t believe in prepping then invest all your pension money in fracking. Thank you!

  17. mx on Fri, 23rd Dec 2016 9:49 am 

    Is that cash flow neutral before these federal tax code advantages?

    – Expensing of Intangible Drilling Costs
    – Percentage Depletion for Oil and Natural-Gas Wells
    – Domestic Manufacturing Deduction for Fossil Fuels
    – Two Year Amortization Period for Geological & Geophysical Expenditures
    – Percentage Depletion for Hard Mineral Fossil Fuels
    – Expensing of Exploration and Development Costs for Hard Mineral Fuels
    – Capital Gains Treatment for Royalties of Coal
    – Deduction for Tertiary Injectants
    – Exception to Passive-Loss Limitation for Working Interests in Oil and Natural-Gas Properties
    – Enhanced Oil Recovery Credit (EOR) Credit
    – Marginal Wells Credit
    – Corporate Tax Income Exemption for Fossil-Fuel Publicly Traded Partnerships
    – Excise Tax Exemption for Crude Oil Derived from Tar Sands
    – Royalty-Exempt Beneficial Use of Fuels
    – Royalty-Free Flaring and Venting of Natural Gas
    – Liability Cap on Natural Resource Damage
    – Subsidies for fossil fuels used in the residential sector
    – Low-Income Home Energy Assistance Program (LIHEAP)

  18. Kenz300 on Sat, 24th Dec 2016 6:15 am 

    The sooner we move away from fossil fuels the better.

    Wind and solar are safer, cleaner and cheaper.

    Cheaper wins !

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