Shale drillers’ production discipline pays off as oil prices fall

Through Kevin crowley to 12/1/2021

HOUSTON (Bloomberg) – Shale drillers’ new commitment to production discipline appears to be paying off as crude plunges into a bear market.

While West Texas Intermediate crude is on the verge of suffering the biggest monthly loss since the coronovirus pandemic began, its meltdown does not lower stocks like it did before. The S&P Oil & Gas Exploration & Production ETF significantly outperforms the US benchmark, and three of the top 10 stocks in the S&P 500 this year are oil companies: Devon Energy Corp. Marathon Oil Corp. and Diamondback Energy Inc.

Shale resilience

“It looks like the market is starting to reward better producer behavior,” said Josh Young, chief investment officer at Bison Interests, a Houston-based fund manager. “They don’t get as much punishment on the way down.”

Listed oil producers have radically changed their business model since Covid-19, slowing production growth and harvesting more cash flow to pay off debt and return to shareholders through dividends and buybacks. While still in its infancy, the new model appears to be working, with stocks apparently more resilient to the possibility of another pandemic-induced slowdown.

In the past, a crash in crude prices triggered a drop in cash flow and growing debt for shale companies, leading to rapid production cuts, frenzied hedges, appeals to bankers begging for forgiveness and – in the worst case scenario. case – bankruptcy. But after a decade of lagging stock performance and multiple price wars with OPEC +, the sector appears to have held back the unbridled growth in output.

Now, many oil exploration and production companies are only reinvesting about half of their cash flow in new drilling, up from 100% or more before the pandemic. This means more money for the shareholders. The lack of long-term supply growth also means that longer-term crude contracts have not fallen as much as the spot price, which is benefiting stock valuations.

“The latest market pullback comes at a fortuitous time in regards to E&P 2022 drilling plans,” said Michael Roomberg, who helps manage $ 3 billion at Miller Howard Investments Inc. The crisis “will likely give a pause.” to any explorer planning to increase production, which will keep returns robust, he said.


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Felix J. Dixon