At $30 oil price, shale rebound may take much, much longer

Debt of US shale companies is trading at 30 to 40 cents on the dollar.

Shale producers may not snap back quite as fast as hoped if oil prices stay in the $30-per-barrel range for much longer.

Energy drillers say the U.S. is finally beginning to see real declines in production, and the longer prices stay low, the longer it will take to reverse the effects across the industry of cutbacks in production, capital spending and staffing.

A Halliburton oil well fielder works on a well head at a fracking rig site January 27, 2016 near Stillwater, Oklahoma.
J. Pat Carter | Getty Images
A Halliburton oil well fielder works on a well head at a fracking rig site January 27, 2016 near Stillwater, Oklahoma.

"Now you're starting to see the decline, and I believe you're going to continue to see the decline as you move through 2016," said Devon Energy CEO David Hager to an audience at the annual IHS CERAWeek energy conference this week.

"Right now to summarize it: $30 and $2 does not work — $30 oil and $2 gas," he said. "Most of us are in place to make sure we can survive, and make sure we are in place when it turns."

U.S. production reached a peak of 9.6 million barrels a day in April 2015, six months after OPEC moved to a market-based strategy that sent prices skidding. U.S. oil output was lifted by the industry's recently completed projects, and production was also supported by hedging, ready financing and technology gains. But financing is no longer easy, and some producers face real hardship, including fire sales or bankruptcy.

"They're going through another round of cuts, and it's now about protecting your balance sheet," said Daniel Yergin, IHS vice chairman, in an interview. But he said the industry should come through this downturn better positioned because of its emphasis on technology and innovation.

There was some hope in the industry that a proposed production freeze between Russia and Saudi Arabia could lead to talks of output cuts, but the industry learned at the IHS CERAWeek conference that cuts are not on the agenda.

Saudi Arabian oil minister Ali al-Naimi made it clear this week that a production cut is not now possible since big producers would not agree to it. He told CERAWeek attendees Tuesday that while there is no war against shale, high costs producers must find ways to lower costs or liquidate, a comment that pushed oil prices lower.

On Thursday, WTI crude rallied in the afternoon to close up 3 percent on news of a major oil producers meeting set for March.

WTI crude
200-day moving average: $44.78
90-day moving average: $37.33
30-day moving average: $30.64
(Source: Stockcharts.com)


"There's a great chance longer term we could overshoot this thing," Hager said. "The strategy now is to survive, keep your strength up, because I do believe there's a brighter day around the corner," he added. Companies are cutting dividends, issuing stock and taking other steps to shore up balance sheets, the Devon Energy CEO noted.

IHS data shows that U.S. exploration and production companies issued about $5 billion in stock year-to-date compared to about $20 billion for all of last year.

Pioneer Natural Resources CEO Scott Sheffield said, "This is the worst I've seen it from a balance-sheet standpoint. Everybody's debt is trading at 30 cents on the dollar, 40 cents on the dollar."

Hager said innovation has become much more important, and for instance, his company is using a higher sand concentration in fracking to increase output. "Thirty dollars (per barrel ) is not working at this point. I think you're going to see a lot of plays that work in $45 to 50 range. At $60, most work. We certainly don't need $90," Hager said.

Sheffield said $50-per-barrel oil would not be enough for growth in the industry, because there would not be enough cash flow.

Service providers are lowering costs. Sheffield said costs are always highest when oil prices are highest, but some suppliers were charging three times what it cost to frack a well when prices were high and production was growing. Now those costs have come down. On Thursday, oil-services giant Halliburton announced it was cutting another 5,000 jobs, after having already reduced its workforce by roughly one-quarter since 2014.

Sheffield said his company focused on its best assets. Pioneer cut back production at the Eagle Ford formation because of production declines, but its Permian basin output is up by 30 percent.