How is Improving Crude Price Triggering Rapid Shale Recovery?

As crude oil prices are recovering from historic lows to more than $35 per barrel, the early signs of shale recovery are in sight. This highlights shale’s preparedness to quickly adjust to crude pricing. However, this might create a greater challenge for OPEC as the group will be forced to extend production curbs.

Backdrop

Supply glut and demand destruction caused by coronavirus-induced lockdowns pushed oil prices to historic lows, triggering producers to lower output in April and May. In March, domestic oil production declined around 13% from a record high of 13.1 million barrels a day, primarily aided by the shale production cut. This also caused a significant number of job losses in the industry. Oilfield service providers — who are heavily dependent on upstream energy companies’ capital budget — had to reduce costs, which in some cases came in the form of layoffs. Even big oilfield service providers like Halliburton Company HAL and Baker Hughes Company BKR followed suit.

Currently, global economies are gradually lifting lockdowns and travel bans. This means that energy demand is bound to improve in the coming days. As such, there is optimism surrounding shale production.

Debt Burden Demands Cash Flow

With debt burden choking most of the U.S. upstream companies, any chance of generating cash flow is a major positive. As such, the WTI crude price moving past the mid-$30s mark is enough to put the companies back on track since the upstream firms are likely to operate some wells profitably in the current price environment. Also, it will enable producers to lock in higher prices for their commodities. The free market structure enables domestic producers to quickly react to the price change.

Shale Players React

EOG Resources, Inc. EOG, one of the biggest shale producers, stalled 125,000 barrels per day of output in May. Due to the changing market environment, the company is now expected to bring much of the curtailed production back online in the third quarter, as stated by EOG Resources’ E&P head Kenneth Boedeker in an RBC Capital Markets conference.

Another shale player, Parsley Energy, Inc. PE also intends to resume the vast majority of its curbed production this month. This Zacks Rank #3 (Hold) company had to shut down 400 wells in March. Although these producers will likely resume output, it is expected in the form of opening up of paused wells rather than drilling brand new wells. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, the potential production cut extension by OPEC for the next few months will pave the way for more domestic producers to resume output. However, any significant rise in shale production can influence OPEC’s decision. Rising crude prices will help shale producers generate more cash flow and reduce debt level. Upstream players like Pioneer Natural Resources Company PXD operating in the Permian Basin, the most prolific basin in the United States, can benefit from the gradual rise in prices. As such, investors in the energy industry are currently monitoring the shale players and their reaction to improving price levels.

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Halliburton Company (HAL) : Free Stock Analysis Report
 
Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
 
EOG Resources, Inc. (EOG) : Free Stock Analysis Report
 
Baker Hughes Company (BKR) : Free Stock Analysis Report
 
Parsley Energy, Inc. (PE) : Free Stock Analysis Report
 
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