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US shale response to Saudi attacks

Published by , Senior Editor
Hydrocarbon Engineering,

The initial 15% oil price jump resulting from the attacks in Saudi Arabia will not have any impact on the trajectory of 2019 US shale production, according to IHS Markit.

“Looking ahead, any effect on 2020 growth will also be muted unless prices are sustained above the mid-US$70s level,” said Raoul Leblanc, Executive Director, IHS Markit.

This price surge is coming at a time when US producers have been battered by financial markets for their profligate spending. As a result, expect shareholders to see the lion’s share of any price windfall.

The 15% surge in prices was one of the largest on record. But it came from a relatively weak base. Prices are still roughly US$8 lower than last year for West Texas Intermediate (WTI).

To gauge the impact on the shale patch, IHS Markit has modeled the impact on production and cash flow of a US$5/bbl and US$10/bbl price increase from a base case around US$62/bbl for 2020.

The base case assumes relatively conservative capital management, anticipating that producers will run a 10% cash surplus in 2020. IHS Markit estimates that for up to a US$10/bbl price increase, 25% of the windfall would be reinvested to lift growth, while 75% would be used to return money to shareholders via debt repay, dividends and buybacks.

In this base case, any price uplift would have a relatively muted effect on US shale output. IHS Markit’s base case price assumption delivers entry-to-exit growth in 2020 of around 480 000 bpd. A US$5/bbl uplift only delivers an extra 50 000 -75 000 bpd of growth (using the assumption of 25% reinvestment).

Also in this base case, a US$10/bbl price increase is more significant, lifting growth from the base by around 200 000 bpd to nearly 700 000 bpd. Nevertheless, this is still much slower growth than 2018 and would likely constitute the deciding factor for global supply/demand balances.

“This is a zero-sum game between re-investment for growth and returning cash to shareholders,” said Leblanc. “Last time producers faced this choice as oil prices rose in early 2018, they ended up spending a large portion of that windfall, causing production to surge and eventually aiding the collapse of oil prices and their equity values. Expect things to be different this time around because investors are forcing them to respond differently.”

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