Shale earnings finally bloom after a decade of steep losses

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(Bloomberg) – U.S. shale drillers are expected to post record second-quarter profits in the coming days, reversing nearly a decade of debt-fueled losses.

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The top 28 publicly traded U.S. independent oil producers generated $25.5 billion in free cash flow in the three months to June 30, according to estimates compiled by Bloomberg. In that space of time, they will have made enough money to erase a quarter of what they lost in the previous decade.

Fracking has revolutionized global energy markets by allowing American drillers to harvest shale resources that were previously untouchable. In just over 10 years, the United States has gone from a declining crude producer to the world’s leading source of oil and gas, but at an astronomical cost: the 28 companies lost approximately $115 billion in the decade before the Covid-19 pandemic.

For the year, free cash flow for the sector is expected to exceed $100 billion, more than double the premium of 2021 and nine times the combined annual catch from 2018 to 2020, according to Bloomberg Intelligence.

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From 2020 to the end of the second quarter, they will have raised more than $85 billion, according to estimates, and the gains should continue for at least the rest of this year.

This is a rationale for the sector’s new business model which prioritizes profits over production growth. For consumers, it’s a sign that shale is no longer willing to fund loss-making drilling projects that have ensured years of plentiful supplies of crude and natural gas.

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« Almost every company will post record earnings and free cash flow, » said New York-based Scotiabank analyst Paul Cheng. “Even if the cost structure tends to increase, the amount of free cash flow generated will be phenomenal. This will remain even if prices return to $80 or $90 a barrel.

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West Texas Intermediate crude, the US benchmark, is trading around $95 a barrel after touching $122 in June. Seven of the top ten stocks in the S&P 500 this year are oil companies or refiners. Occidental Petroleum Corp., in which Warren Buffett’s Berkshire Hathaway Inc. has invested heavily, leads with a return of 117%.

Even so, some analysts argue that energy stocks are undervalued. Independent oil stocks are valued as if oil is trading around $55-60 long-term, though prices can hover around $100 for years, according to Matthew Portillo, an analyst at Tudor, Pickering, Holt & Co.

Tight fundamentals

“Equities are anticipating a recession similar to 2008, but there is a disconnect because crude fundamentals remain very tight,” he said. The executives « will aggressively look at buybacks given the recent stock sell-offs. »

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Matador Resources Co., a Permian Basin shale driller, provided the first glimpse of strong results by posting a fourfold increase in net profit and doubling its dividend. But it came with a warning in the form of a 17% jump in planned capital spending due to cost inflation and plans to roll out another platform.

Oil mercenaries finally have the leverage they need to increase the fees they charge to drill and fracture wells for clients like Matador, well beyond what it takes to meet inflation.

« It’s different now, » Chris Wright, chief executive of second-tier fracking provider Liberty Energy Inc., said in a phone interview. « The cards have generally been in the hands of our customers, not so much in our hands. »

« Fantastic » returns

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Halliburton Co., the world’s largest fracker, said the market for all the equipment needed to complete new wells is nearly sold out for the rest of this year and customers are already talking about plans for 2023, much earlier. provided that.

Hess Corp., which estimates industry-wide inflation at 20%, is feeling the pinch of rising costs. The New York-based explorer is keeping spending relatively stable while reducing its production forecast. Drilling and fracturing costs are rising by $100,000 per well in the Bakken area of ​​North Dakota, the company’s main theater of operations.

That burden is manageable because even at $60 oil, Hess said its Bakken wells generate more than $1 billion in free cash flow.

« At current prices, these yields are fantastic, » chief operating officer Greg Hill told analysts and investors on a July 27 conference call. « Certainly the movement in the price of oil from a yield perspective outweighs any inflationary effect. »