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The Shale Boom in the Permian Is Slowing Down


The promise of the Permian is shrinking.

Producers in the nation’s oil-rich shale basins are dialing back growth plans in the face of a growing panoply of problems that’s killing returns and keeping skeptical investors at bay.

The constraints are manifold: pipeline limits, reduced flow from wells drilled too close together, low natural gas prices and high land costs. But the most consequential is that shale-well production falls off at such a high rate — as much as 70% in the first year — that you need to keep spending cash on new wells just to maintain output.

In the five years since oil fell below $30 a barrel from more than $100, a resilient shale industry has established the U.S. as the world’s top oil producer. Now, cracks are opening in that survival tale, with companies ranging from EOG Resources Inc. to tiny Laredo Petroleum Inc. dropping their 2019 growth rates by 3 percentage points to more than 40 below last year’s gains.

“You’re having to spend more and more every year to grow at a faster rate,” said Noah Barrett, an energy analyst at Janus Henderson, in a telephone interview. “Companies routinely spent 120 to 130% of their cash flow never generating positive cash flow or earnings.”

Dialing Back

Most shale producers will still see output growth, but they expect it to be slower

Source: Company reports and data compiled by Bloomberg

Note: Occidental data reflects Permian shale unit only

In the early years, Wall Street had been happy to fund shale growth, framing the budding sector as a young, technology-driven industry, ripe for future returns. But as the shale fields aged, the returns never came and shareholders are now pushing for payback at the expense of additional oil growth.

The Permian has been the world’s fastest-growing major oil region over the past two years, growing 72 percent to 4.2 million barrels a day. But the pace of that growth is under threat as producers bow to investor demands to stop spending money.

Most of the independent producers cut their capital budgets after oil prices slipped at the end of last year. While companies including Diamondback Energy Inc. and Devon Energy Corp. have bolstered buybacks, investors warn there’s a long road ahead to recovery.

“They’ve been burned so many times in the past that there’s deserved skepticism” toward energy stocks, according to Barrett, whose firm manages $328 billion. “Just when we get progress, managements have short memories and start spending capital in an undisciplined manner.”

The smallest companies have been among the hardest hit.

Times should be good for Legacy Reserves Inc. and Approach Resources Inc., two small producers working in the oil-rich Permian. Crude prices are edging up, and big drillers want to expand there. Yet they’ve lost 99% and 87% of their market value in the past year, and Legacy last month filed for Chapter 11 protection.


Performance in Past 12 Months

Legacy Reserves -99%
Halcon -95%
Approach -87%
Lilis Energy -89%
Ring Energy -76%
Laredo -69%

But it’s not just the minnows that are struggling. Bigger producers, including Parsley Energy Inc., QEP Resources Inc., Centennial Resource Development Inc., SM Energy Co. and Cimarex Energy Co. have all lost between 42% and 59% of their market value in the past year. Meanwhile, the price of West Texas Intermediate crude, the U.S. benchmark, is only down 14%.

For the biggest companies — majors such as Exxon Mobil Corp. and Chevron Corp. — battling decline rates means drilling so many wells that they create a long, low-decline tail of production that makes money for years with little reinvestment. But that takes time and a lot of money, a luxury not available to many independent players.

Stock offerings last year were the lowest since at least 2006 and were down more than 60% versus 2017. With public capital harder to come by, producers including Pioneer Natural Resources Co., Devon Energy Corp. and Apache Corp. have sold off less-important acreage as they seek to tap their most productive acreage.

Up in Smoke

North American oil producers burned through $187 billion of cash since 2012

Source: Bloomberg Intelligence

Other producers are tapping private capital to help drill wells outside of their regular capital expenditure program. One private equity firm puts the number of so-called DrillCo deals at more than $5 billion since mid-2015.

In those arrangements, private equity investors pay to drill certain areas outside a producer’s budget. Once oil flows, the buyout firm receives the majority of the cash flow, but when costs are repaid and investors earn a pre-agreed profit, revenues revert to the producer.

The strategies may be different but the goal’s the same: “It’s really just designed to accelerate this free cash flow generation, and get these companies to try to prove earlier to investors that they are good businesses,” said Rob Thummel, managing director at Tortoise, which handles energy-related assets.

Such measures mean the U.S. will continue to see shale production, but the explosive surges of the past may be over, according to Janus’s Barrett.

“U.S. production in absolute terms will continue to grow,” he said. “But the pace of production increases will slow.”


17 Comments on "The Shale Boom in the Permian Is Slowing Down"

  1. Darrell Cloud on Fri, 12th Jul 2019 6:38 pm 

    This is the kicker: “…the most consequential is that shale-well production falls off at such a high rate — as much as 70% in the first year…”

  2. makati1 on Fri, 12th Jul 2019 6:51 pm 

    What if…the new frakin’ liquids have no buyers? It is about useless without the imported heavy stuff to blend it with. Not to mention the decreasing ability of the US tax slaves to buy the end products. And, what if the refineries are taken out by Mother Nature? Barry anyone?

    I would hate to have my future dependent on oily incomes or an oily career. Must be difficult to sleep when the price bounces all over the map (pun intended). Not to mention the Stock Market Casino dirigible about to explode. Fun to watch…from the cheap seats outside the US.

  3. Coffeeguyzz on Sat, 13th Jul 2019 12:32 am 


    carry on with the ordinary, always inaccurate doom peaker porn.

  4. Davy on Sat, 13th Jul 2019 12:47 am 

    Thanks for the update Nony. No need to yell. Things aren’t all that bad yet, but they will be. That’s why I’ve set up a monestary for all of the others in my area.

    All you folks from St. Louis are welcome to join in. Please see the forum archives for details.

    Oh, and don’t forget yer guns. The more the merrier!

  5. Econ101 on Sat, 13th Jul 2019 12:54 am 

    Damn straight Coffeeguyzz. Once again, you’ve hit it out of the park. No one here can match your insightful analysis and keen intellect. Glad you are on our side Coffee.

  6. Brent Georgeson on Sat, 13th Jul 2019 1:36 am 

    I find it very interesting when peak oil deniers say well peak oil is not real because everybody was wrong a few years back it has not happened yet ect…. But when all the oil companies who said shale oil is going to be a huge money maker just trust us. We are going to strike it rich are shown to be wrong they have no problem with that.

  7. Anonymous on Sat, 13th Jul 2019 3:51 am 

    Yes, it’s slowing down, but slowing down from a rather stupendous pace. Over 1 MM bopd/growth for one play is rather stupendous and that’s what we had last year.

    Analysing the EIA DPR data, the rate of YTY growth has dropped from slightly over 1MM bopd/year (during most of last year) to about 0.8, for this year.

    Not clear how that will look going forward. Pipes opening should allow more oil to flow, but really the Midland to Cushing differential is not very bad right now regardless. May go slightly positive with oil flowing to the GOM. But not a lot of room for it to go up much given it’s not blown out now. Gas line in OCT will help out a bit (and here the basis is blown out), but gas is not a huge driver of the economics.

    The chart of expected growth is interesting, but I would prefer to see it with absolute scale, not percent. Absolute growth is what affects the markets. And percentages depend a lot on how big the company is, how new etc. Probably even on an absolute basis, growth projections are less. But it will be not as extreme as the % chart makes it look.

  8. JuanP on Sat, 13th Jul 2019 4:54 am 

    OOps, I am JuanP not Davy

    Juanpee id theft:
    Davy on Sat, 13th Jul 2019 12:47 am
    Thanks for the update Nony. No need to yell. Things aren’t all that bad yet, but they will be. That’s why I’ve set up a monestary for all of the others in my area.
    All you folks from St. Louis are welcome to join in. Please see the forum archives for details.Oh, and don’t forget yer guns. The more the merrier!

  9. More Davy Identity Theft on Sat, 13th Jul 2019 7:01 am 

    JuanP on Sat, 13th Jul 2019 4:54 am

  10. joe on Sat, 13th Jul 2019 5:16 pm 

    What’s that rule about reducing marginal return in economics?
    Over time, the more you invest, the less you get out due to cost pressures and competitive forces. America needs conventional oil. That peaked long ago, now the plateau will dip, prices are going to start going nuts again. Especially if people want to play games with tankers globally. I feel sad for all those millenials who got ‘woke’ after their economic future vanished in front of them in 2008. The leapt from ‘occupy’ to ‘antifa’ and ‘blm’. Poor fookers life’s are stage managed.

  11. Kenz300 on Sat, 13th Jul 2019 7:22 pm 

    Fossil fuels are a bad investment for people and the planet.
    Wind and solar are a much safer investment.
    They are safer, cleaner and cheaper.

    How many coal companies have filed for bankruptcy.
    Soon it will be natural gas on decline.

    Hard to compete with Wind and solar. No monthly fuel bills once built.

  12. Davy on Sun, 14th Jul 2019 4:23 am 

    “US Naval Coalition In Gulf – A Provocation Too Far” strategic culture dot org

    “America’s top General Joseph Dunford this week announced plans for a US-led naval coalition to patrol the Persian Gulf in order to “protect shipping” from alleged Iranian sabotage.”

    “The move is but the latest in a series of efforts by the Trump administration to mobilize Arab allies into a more aggressive military stance towards Iran. It follows recent visits to the region by Secretary of State Mike Pompeo and National Security Adviser John Bolton, both of whom have been urging a more organized military front led by the US to confront Iran.”

    “The latest naval coalition proposed by General Dunford will be charged with escorting oil tankers as they pass through the Strait of Hormuz exiting the Persian Gulf to the Indian Ocean, and also through the Bab al Mandab entrance to the Red Sea on the Western side of the Arabian Peninsula. The former conduit serves oil supply to Asia, while the latter position between Yemen and Eritrea leads shipping to the Suez Canal on the way to the Mediterranean and Europe. Both narrow sea passages are strategic chokepoints in global oil trade, with some 20-30 per cent of all daily shipped crude passing through them.”

    “The apparently chivalrous motives of the US to “guarantee freedom of navigation” sounds suspiciously like a pretext for Washington to assert crucial military control over international oil trade. That is one paramount reason for objecting to this American proposal.”

    “Secondly, the very idea of sending more military vessels to the Persian Gulf under Pentagon command at this time of incendiary tensions between the US and Iran is a reckless provocation too far.”

    “In the same week that the Pentagon called for a naval coalition, the US and Britain were blaming Iranian forces for trying to block a British oil tanker near the Strait of Hormuz. Iran has dismissed the allegations that its naval vessels interfered in any way with the British tanker. Both London and Washington claimed that a British Royal Navy frigate had to intervene to ward off the Iranian vessels. Iran’s Foreign Minister Mohammad Javad Zarif dismissed the accusations as “worthless”.”

    “The latest incident follows a string of sabotage attacks against oil tankers in the Persian Gulf by unidentified assailants. The US has blamed Iran. Iran has vehemently denied any involvement. Tehran has countered by saying that tensions are being inflamed by “malicious conspiracies”.”

    “One can easily foresee in this already supercharged geopolitical context in the Persian Gulf and the wider region how any additional military forces would be potentially disastrous, either from miscalculation, misunderstanding or more malign motive.”

    “Furthermore, media reports indicate a heightened wariness among some Gulf Arab states about being pushed into confrontation with their neighbor Iran. US policy is recklessly fomenting regional tensions against the better judgement of proximate countries.”

    “The Washington Post reported this week: “The escalating tensions in the Persian Gulf have exposed differences between the United States and its regional allies, in part over how aggressively the Trump administration should confront Iran… With these countries likely to find themselves on the front lines of any military conflict with Iran, some of the smaller states are hesitant to support the more combative stance of the United States and regional heavyweights Saudi Arabia and the UAE.””

    “The report goes on: “The more-assertive approach championed by Saudi Arabia — and in particular by Crown Prince Mohammed bin Salman — puts the kingdom at odds with some of the smaller US allies in the region, which want to see the crisis settled through negotiations. Kuwait and Oman, which have pursued bilateral relations with Iran, have long resented Saudi attempts to pressure them to adopt a more confrontational foreign policy, analysts say.””

    “Qatar is another important regional player which is bound to have misgivings about the growing tensions. The gas-rich emirate has been roughed up by Saudi Arabia and the UAE with a two-year blockade on trade and political links. While Qatar is a US ally and a Sunni Arab neighbor traditionally aligned with Saudi Arabia, the country also shares the region’s close historical trading ties with Shia Iran to the North. Centuries of overlapping cultural ties belie the attempt by the US and its Saudi and UAE allies of trying to polarize the region into an anti-Iran axis.”

    “Aware of the danger of a catastrophic war erupting, several regional states are right to be even more alarmed by the latest proposition of a naval coalition led by the US. Washington is arrogantly over-stepping its presumption to control global oil trade, and it is pushing tensions in the region with a provocation too far. Hopefully, reckless US-led antagonism will be rebuffed by wiser regional states who stand to lose much more than Generals and warmongers sitting comfortably in Washington.”

    “Moreover, the correct way to calm and resolve tensions in the region is for the Trump administration to halt its aggression towards Iran and to respect the 2015 international nuclear accord which it unilaterally trashed last year. Remove sanctions and warships from the region and – for a fundamental change – respect international law, diplomacy and peaceful negotiations.”

  13. Davy on Sun, 14th Jul 2019 4:32 am 

    I posted this article because it shows how the closer our nation gets to collapse, the more desperate we become. If we get this war going it’ll end up biting us in the ass. Those 3am flashes are looking more likely every day.

    We need to stop antagonizing the planet Earth and bring our troops home now.

  14. Davy on Sun, 14th Jul 2019 4:53 am 

    Oops, sorry everyone. Wrong link again.

  15. JuanP on Sun, 14th Jul 2019 5:08 am 

    JuanP id theft:
    Davy on Sun, 14th Jul 2019 4:23 am
    “US Naval Coalition In Gulf – A Provocation Too Far” strategic culture dot org

    Davy on Sun, 14th Jul 2019 4:32 am
    I posted this article because it shows how the closer our nation gets to collapse, the more desperate we become. If we get this war going it’ll end up biting us in the ass. Those 3am flashes are looking more likely every day. We need to stop antagonizing the planet Earth and bring our troops home now.

    Davy on Sun, 14th Jul 2019 4:53 am
    Oops, sorry everyone. Wrong link again.

    juanPee, your article is fine, good work. I see you are reading ZH. That is good too. As you can see plenty of extremist articles for you to choose from. I can’t figure out why you are so triggered by ZH? I guess you don’t like the Kunstler type articles that attack your blind lying liberal establishment.

  16. More Davy Identity Theft on Sun, 14th Jul 2019 5:10 am 

    JuanP on Sun, 14th Jul 2019 5:08 am

  17. Brent Georgeson on Sun, 14th Jul 2019 2:15 pm 

    Yeah definitely nothing to worry about.

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