U.S. SHALE OIL UP
FT - US shale oil companies have started to generate free cash thanks to the rise in crude prices, a landmark moment for an industry that has until now relied on an inflow of capital to support its growth.
Leading shale oil producers were able to cover their capital spending on new wells from their operating cash flows by the end of last year, and are generating significant free cash with oil prices at present levels, according to Wood Mackenzie, the research company.
The shift among leading shale producers to becoming self-financing is removing one of the key concerns for investors. US oil companies' share prices for months lagged behind the crude price as it started to climb last year, but in April they have started to rise as investors have become more hopeful of improved returns.
Andrew McConn of Wood Mackenzie said the larger US shale oil companies needed a crude price of about $53 a barrel to generate free cash. Benchmark US crude was $68 a barrel on Friday.
"It's quite a windfall for a lot of these companies," Mr McConn said.
From the time the first shale oil test wells were drilled in the US in 2008-09, the industry's capital expenditures have exceeded its cash from operations. Shale producers have been able to stay in business only by attracting hundreds of billions of dollars in financing from bond and share sales and bank loans. Over 2008-17, US exploration and production companies raised $293bn from bond sales, according to Dealogic.
Continued improvements in the techniques of horizontal drilling and hydraulic fracturing have brought costs down sharply, however.
Scott Sheffield, chairman of Pioneer Natural Resources said its wells in the Permian Basin of Texas and New Mexico were now 300 per cent more productive than four years ago, driving down the price needed for them to make a profit.
"In 2014, our break-even price in the Permian Basin was probably $55 or $60 a barrel," he told the Columbia Global Energy Summit last week. "I would never have thought that the Permian Basin could drive down the break-even price to the low $20s. And we did it."
As crude prices have climbed since June last year, US exploration and companies' shares, which typically follow the commodity, have lagged behind. This month, however, they have started to rise. Since the start of April, shares in EOG Resources and Continental Resources are up 11 per cent, and for Pioneer Natural Resources they are up 17 per cent.
Market valuations had been held back by concerns including the industry's cash outflows and low returns on capital, and fears that surging US production might again create a glut in world markets and send prices tumbling as it did in 2014.
But in recent months many shale companies have been saying that they will focus on improving returns rather than growth at all costs. Several have announced increased dividends and share buybacks, including Anadarko Petroleum, Devon Energy and Hess.
"Investors are becoming more confident that US shale isn't going to be a runaway train," said Trip Rodgers of BP Capital Fund Advisors, an energy investment management firm.
With growing threats to global oil supplies, including the crisis in Venezuela, fears of another slump in prices are also fading.
"A lot of investors are still scared from oil collapse of 2014 and 2015," said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors. "They are starting to get over their fear and look at the fundamentals again, and the fundamentals are very supportive."
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