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 owing 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 per cent 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, the Organization of the Petroleum Exporting Countries 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 producer, said in an interview. His outlook for shale in 2021 is “stagnant.”
Company outlays next year will reach US$54-billion ($70-billion), up slightly from 2020 but well below 2019′s US$104-billion, estimates data provider IHSMarkit.
Top independent shale producers Pioneer Natural Resources Co., Diamondback Energy Inc. and ConocoPhillips forecast output flat to slightly above current levels.
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 Corp.
This year, U.S. oil futures turned negative for the first time as storage tanks filled, rigs hit the lowest level on record and Exxon Mobil Corp. 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 per cent 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 oil field 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 oil field jobs disappeared, said Allen David, top executive of Eddy County.
U.S. oil output could fall by 1 million barrels a 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 per cent in the past 12 months to the lowest in two years, according to U.S. government data.
M&A HOPES FIZZLE
Investor hopes for deal-making to produce 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],” Mr. Dickson said.
“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.
“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 US$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 Mr. Reger, “you can pretty much live through any year.”
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.