Crude oil prices are plunging under the weight of the latest coronavirus variant news and a speculator-driven selloff. But this time, U.S. shale drillers seem to be quite immune to the trend. Their stocks are not plunging in unison with oil benchmarks. There is no panic in the shale patch. Thank discipline.
“It looks like the market is starting to reward better behavior by producers,” Josh Young, chief investment officer at Texas-based money manager Bison Interests, told Bloomberg’s Kevin Crowley this week. “They’re not getting punished as much on the way down.”
The shale patch was forced into this strict discipline by the pandemic, which last year coupled with trader jitters to cause an unprecedented drop in prices, for a short while plunging WTI below zero. Many exploration and production companies went under. Those that didn’t have rearranged their priorities, focusing on returning cash rather than boosting production at all costs.
The latest stock moves—or rather the lack of any dramatic moves—are one proof that the disciplined approach is working. Another is that production is finally growing, and stocks are not being affected negatively by this.
Rystad Energy said last month that U.S. shale oil output could reach 8.68 million bpd this month. This, the Norwegian energy consultancy said, would be the highest production level since March 2020. In the Permian alone, Rystad sees December output at over 5 million bpd. That would be the highest since 2015.
Drilling is also picking up across the shale patch. The drilled but uncompleted well inventory is nearing depletion at the fastest rate ever recorded, and E&Ps are drilling again. This DUC depletion is part of that new disciplined approach. Completing a well is much cheaper than drilling a new one, and there were thousands of DUCs waiting to be finished. So shale drillers chose to complete these in the third quarter in response to rising demand rather than spend more on drilling new wells. As a result, their free cash flow position continued strong, and so did their stock.
It took two market crashes for shale drillers to learn this lesson, but they did learn it well. Before, production growth was the number-one priority trumping all else. This led to years of cash-burning, huge debt piles, and, worst of all, unhappy investors. Now, it is investor returns above all and a guarded attitude toward production growth. Even insistence from the administration doesn’t seem to have made a difference.
Of course, it must matter how the insistence was being expressed, and it wasn’t being expressed in the best way. Energy Secretary Jennifer Granholm has, in a way, asked the U.S. oil industry to start pumping more oil, but she chose to do it by accusing said industry of raking in fat profits from higher oil prices and using them to reward their shareholders instead of boosting production. That’s an approach similar to the EU’s approach to dealing with Russia—and abundant evidence suggests it is not the most productive one.
Right now, prices are down sharply, which might give a pause to production growth, especially coupled with the depletion of DUC stocks. But it will also reinforce the disciplined approach in an industry that has been battered by price slumps often enough to know better. And this discipline will, in turn, serve to limit the downside potential of prices.
How long the rout will continue remains to be seen and largely depends on information about the latest coronavirus variant. Some argue that the current selloff is mostly driven by speculators, although industry insiders note that it has come too far, too fast, Reuters reported this week. This means the effects of this selloff will likely soon disappear as the panic subsides with more data about the omicron variant.
Yet, for shale drillers, it won’t matter as much as before how high or low crude oil is trading. They seem to have found the way to their investors’ hearts, and they are focusing on this after years of sinking billions into production boosts that only served to make the blow of the pandemic harder on everyone in the industry.