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Analysis: Shale's growing profits at the mercy of OPEC cuts, Trump tweets

Reuters  |  HOUSTON 

By Jennifer Hiller

HOUSTON (Reuters) - The recent nosedive in crude prices came just as producers had started delivering healthy returns after years of heavy spending to boost production and market share.

The shift has pleased investors who had grown weary of waiting for a payoff while watching the frenetic west boom make the the world's top producer and a major exporter.

The 29 percent drop in U.S. prices since October now threatens those improved margins, and sustained prices below $50 could dent the value of reserves, which banks use to determine borrowing power.

Activity in the largest U.S. field could fall 10 to 20 percent next year if prices stay down, said Steven Pruett, of shale producer The price retreat sparked a sell-off of shale firms' shares and another setback could sour investors on the sector for years.

The dynamic leaves shale producers hoping for a rescue in the form of production cuts from The Organization of the Producing Countries (OPEC) when it meets on Thursday - and at odds with U.S. Donald Trump, who has pushed to keep the taps wide open.

Although Trump has generally been a boisterous booster of fossil-fuel firms, he has ridiculed the prospect of production cuts as "ripping off the rest of the world" by artifically inflating consumer fuel prices.

In November, Trump praised on for high production that helped push down about 30 percent to near $50, calling it "like a big Tax Cut."

Such tweets are an "irritant" to a U.S. trying to solidify its profitable position.

Trump's "leaning on" Saudi Arabia, the most influential nation, "has had a great effect," Pruett said.

"To me, it's a lot of meddling," he said.

Trump's campaign against OPEC cuts comes after he stood by the kingdom and Saudi Crown despite U.S. politicians calling for sanctions over the October killing of at in Istanbul. Salman wants to avoid confrontation with Trump, Saudi watchers say, including over cuts and prices.

While shale producers have made strides in recent years at turning profits with lower oil prices, they are nearing a threshold where some would scale back investment, said Phil Flynn, an at in

"The reality is a lot of them get scared at $50, and their bankers get scared at $50," said Flynn. "They want OPEC to make a cut, and they kind of want to stop tweeting about oil."

U.S. will rise 17 percent this year to average daily output of 10.9 million bpd, and hit 12.06 million bpd by mid 2019, according to estimates. After years of increasing capital spending, companies including Anadarko Corp plan to freeze or cut those budgets, passing the savings to investors.

Even if OPEC pulls back and global prices stabilize at current levels, it may not be enough for shale to regain investor favor, said Bruce Campbell, of advisers Campbell, The firm owns shares because of its strong dividend and balance sheet, but no longer sees a reason to invest in shale.

Shale companies can cut costs further, "but it takes 12 to 18 months to roll through the system" and get profits rising again, he said. Without higher crude prices, it will be tough for investors "to find a place to get excited about," Campbell said.


Since the 2014-2016 price war between OPEC and shale producers - when soaring global supply pushed per-barrel prices down into the $20s - west shale drillers have learned to wring profits at prices as low as $38 a barrel, down from about $71 in 2014, according to consultancy Rystad

But breakeven prices in other U.S. fields range from about $43 to $48 per barrel, not far from November's low.

Meanwhile, producers' costs are about $11 a barrel in Iraq, less than $17 in Saudi Arabia, and less than $21 in Kuwait, according to Rystad.

These countries, however, need much higher prices to finance their state spending. In Saudi Arabia, crude would have to average $85-87 a barrel to cover this year's state budget, an said.

The U.S. industry is still expanding the use of more efficient drilling techniques, and oil majors' BP Plc, Chevron Corp, and are expanding shale operations and building to keep production rising.

"Shale is a scale business," said Shawn Reynolds, a at investment firm

He sees an industry just now poised to move out of its costly development phase and into what Reynolds calls "harvest mode," pulling profit from past investments.

But a continued price decline would threaten recent robust earnings. Last quarter, profit rose four-fold over a year earlier aided by cost cuts that "significantly improved our resilience to low prices," said during an earnings call last month.

Anadarko swung to a profit and said it expects to increase production 10 percent to 14 percent next year, assuming "$50 oil," said

Other producers are counting on a replay of 2016, when OPEC cut output and prices gradually increased.

"I've been through it before," Bob Watson, of shale producer Abraxas Corp, said in an interview. He has told his employees not to worry about the price: "It will come back. You just need to keep executing."

Watson, like other large shale companies, used financial derivatives to lock in some of its future production at $56 a barrel, a move that lets it ride out the recent drop barring a sustained change.


Non-OPEC will rise by 2.3 million bpd this year while should grow by a 1.3 million bpd next year, projects the International Agency, which advises major on policy. That could lead again to a market awash in oil, lowering global prices.

OPEC this week must decide whether the global will need more oil or less. After months of producing well below the group's target, group leaders increased production last summer and by October had added nearly 400,000 barrels per day over September. also increased its production by about 460,000 bpd above its cap.

"OPEC realizes that in the last downturn, in an effort to grab market share, they got nowhere. They ended up losing market share to some extent," said Muqsit Ashraf, for energy at consultancy Strategy.

One lesson from the last price war is shale can expand production even at prices that hurt OPEC members' budgets, said Karr Ingham, a Texas

Companies in the Permian Basin pumped 1.6 million bpd in June 2014 when prices peaked at $107 and output rose to nearly 2 million bpd two years later as prices fell to $26, according to data from the

"OPEC can wait from now until kingdom come, but they won't get … a production decline" from the Permian field, Ingham said.

(Reporting by Jennifer Hiller; Editing by and Brian Thevenot)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Wed, December 05 2018. 18:03 IST