Analysis: U.S. shale oil just had its worst year and the pain could bleed into 2021

Abraxas Petroleum

22/12/2020 11:00

By Jennifer Hiller and Devika  Krishna Kumar
    HOUSTON/NEW YORK, Dec 22 (Reuters) - U.S. oil and gas shares
and drilling activity are edging higher, but a disastrous year
for the energy industry means the go-go days of the shale boom
may be gone for good.
    Deep spending cuts that came with the collapse in fuel
demand and oil prices due to the COVID-19 pandemic have ended an
era that put the U.S. atop the ranks of the world's biggest
producers. The shale industry will ring in the New Year pumping
7.44 million barrels per day (bpd), down nearly 20% from the
beginning of 2020.
    Shale producers were hit hard after borrowing to expand
production and slashed spending and output to cut losses. Shale
wells' quick development made it the first choice at larger
firms to impose cuts. 
    Rising demand for cleaner fuels means global consumption may
never return to its prior peak. As growth resumes, OPEC and
allies plan to increase their output, undercutting efforts to
restart some shale fields.   
    "We are just going to keep slogging through everything,"
said J.R. Reger, chief executive of Iron Oil, a Montana oil and
producer said in an interview. His outlook for shale in 2021 is
"stagnant."  
    Company outlays next year will reach $54 billion, up
slightly from 2020 but well below 2019's $104 billion, estimates
data provider IHSMarkit. 
    Top independent shale producers Pioneer Natural Resources
 PXD.N , Diamondback Energy  FANG.O  and ConocoPhillips  COP.N 
forecast output flat to slightly above current levels. 
      
    INDUSTRY NADIR 
    Until this year, "there has never been a straight week in my
whole career where I haven't had a rig drilling somewhere,” said
Robert Watson, CEO at Abraxas Petroleum  AXAS.O . 
    This year, U.S. oil futures  CLc1  turned negative for the
first time as storage tanks filled, rigs hit the lowest level on
record, and Exxon Mobil  XOM.N  was dropped from the Dow Jones
Industrial Index of major U.S. companies. 
    Energy and petrochemical firms slashed employment as oil
retreated, putting 107,000 U.S. workers out of jobs by August,
according to consultancy Deloitte. Up to 70% of those jobs may
not return next year, it said.    
    "It has been a terrible time," said William Walla, who in
March lost his job at a Texas oilfield equipment maker as orders
tumbled. He has kept himself by brokering sales and lending
deals.
    In New Mexico's shale patch, more than 20,000 oilfield jobs
disappeared, said Allen David, top executive of Eddy County.
    U.S. oil output could fall by 1 million barrels per day next
year, say analysts, on top of a 670,000-bpd drop this year, as
production cuts and wells age.
    Some smaller companies are holding output flat by turning to
finishing untapped wells. These drilled-but-uncompleted wells
fell to 7,330 in November, down 7% in the last 12 months to the
lowest in two years, according to U.S. government data.
    
    M&A HOPES FIZZLE  
    Investor hopes for deal-making to producer stronger shale
firms has produced a handful of deals so far. Some producers
will need to slash debt to become buyout candidates, said Duane
Dickson, U.S. oil, gas and chemicals leader at Deloitte.
    "There's a relatively small number of good opportunities
(left)," said Dickson. 
    "It's hard to make the case for energy, even for the best of
companies," said Hank Smith, head of investment strategy at
Haverford Trust. He has soured on the outlook for fossil fuels
in part because of the rise of alternatives, such as solar and
wind power.  
    
    BANKRUPTCIES JUMP
    "It has been a bloodbath in the sector," added Dan
Pickering, investment chief at asset managers Pickering Energy
Partners. Recent gains in energy shares reflect a bounce off
decade lows and will be hard to sustain.
    "We haven't seen a shift to long-only investors," he said.
    Oil bankruptcy filings climbed this year, with $53.9 billion
in debt through the first 11 months, about four times that of
the same period in 2019, according law firm Haynes and Boone.
Most of the filings were from shale firms, and the pace may pick
up next year, said Kraig Grahmann, the head of its energy
finance practice. 
    The bright spot for shale: It won't be 2020 for much longer.
    "If you get through 2020," said Iron Oil's Reger, "you can
pretty much live through any year." 

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GRAPHIC-U.S. crude oil prices plunge on pandemic demand loss   
https://graphics.reuters.com/OIL-OUTLOOK/xklvyjgnepg/chart.png
GRAPHIC-A collapse in spending for U.S. shale fields    https://graphics.reuters.com/OIL-OUTLOOK/gjnvwkylbvw/chart.png
GRAPHIC-U.S. crude oil production tumbles in 2020    https://graphics.reuters.com/OIL-OUTLOOK/azgpoybnepd/chart.png
GRAPHIC-U.S. oil and gas employment    https://graphics.reuters.com/OIL-OUTLOOK/oakvejmzqpr/chart.png
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 (Reporting by Jennifer Hiller in Houston, Devika Krishna Kumar
in New York and Arathy S Nair in Bengaluru; editing by Gary
McWilliams and Lisa Shumaker)
 ((Jennifer.Hiller@thomsonreuters.com; +1 281 254 9109;
Twittter: @Jennifer_Hiller))