Shale's new era spells higher oil prices

Hello and welcome back to Energy Source — coming to you from Texas today.

Occidental Petroleum yesterday became the latest oil producer to post better-than-expected earnings, bringing in full year net income of $3.8bn in 2023. 

Meanwhile, oil patch dealmaking is back in the spotlight here after Diamondback Energy came out on top in the race for Endeavor Energy Resources this week — snagging a $26bn deal for one of the last remaining big private operators, despite interest from bigger players.

I reported this week on the new phase that the US shale patch has now entered as private players exit the stage and a handful of large public players reign supreme in the world’s biggest oil-producing nation.

In today’s newsletter, I dig deeper into what to expect from the revamped shale patch, looking specifically at what is in store for prices.

In a nutshell: in the coming era of more consolidated, steady and disciplined production, don’t count on US drillers to douse higher prices.

Get in touch with your thoughts: myles.mccormick@ft.com.

Thanks for reading — Myles

US shale: fewer players, higher prices

The US shale patch has (once again) entered a new era. 

As a tidal wave of M&A activity continues to wash across the industry — this week’s Diamondback-Endeavor deal brought the value of the bonanza since the beginning of last year to about $180bn — the sector has been utterly reshaped. 

This new, more mature industry is a different beast to the one that came before. It has shifted from a patchwork of thousands of small-time drillers to one where a handful of big, publicly listed players will call the shots.

That is good news for shareholders in these titans of US shale, which will prioritise churning out healthy returns to investors. It is less good news for consumers, who are likely to find themselves on the receiving end of higher prices over the coming years. 

That’s because the shale patch will no longer ride to the rescue with new drilling campaigns when prices surge. The era of the US acting as the world’s swing producer — a role that had already diminished — is officially at an end. 

“There is no way the US rig count grows after the recent wave of consolidation,” Conrad Gibbins, co-head of the upstream Americas business at Jefferies, told me. “That points to one thing, which is we’re headed towards higher oil prices. It’s not a question of if, it’s a question of when.”  

Taking a step back: in its heyday about a decade ago, shale’s ability to rapidly increase output meant that as prices rose, a proliferation of drillers from Texas to North Dakota could open the taps to take advantage of the price surges. Their rapid growth tamed high prices — much to the chagrin of Opec and their own investors. 

Over the past five years, Wall Street’s insistence on returns over growth has meant the big public players’ focus has shifted from drilling the next well to funnelling cash back to shareholders. 

But the private players, unshackled by demands for dividends and buybacks, still kept the torch burning — and the rigs running. 

In the Permian Basin, by far the most prolific oilfield in the US, between early 2021 and the end of last year, the biggest private players — Endeavor, Mewbourne and CrownRock — in effect doubled their production, while public players grew output annually by single digit percentages.

The private groups accelerated drilling sharply as prices rose after Russia’s full-scale invasion of Ukraine, helping to keep a lid on prices even as their public counterparts shrugged off President Joe Biden’s calls for more drilling. 

Last year, US production surged by 850,000 barrels of oil equivalent a day, according to Wood Mackenzie, helping to keep a lid on prices even amid swingeing Opec cuts. Analysts do not expect that volume of growth to be repeated, with companies set to add just 150,000 boe/d this year.

Exemplifying the shift taking place across the shale patch, of the trio of big Permian privates, Endeavor and CrownRock will soon be in the hands of large, disciplined public companies with little intention of splurging on growth, whatever prices do. Indeed, Diamondback made clear this week it would remove rigs from the field as it outlined growth plans well below what Endeavor has pursued in recent years. 

“The private [exploration and production groups] were the last remaining vectors of that era of very price-cyclical boom and bust growth cycles,” said Matthew Bernstein, senior analyst at consultancy Rystad Energy. 

“These are operators that have really been driving much of the production growth and running these much more ambitious growth programmes than their public counterparts since 2019 when capital discipline went into effect . . . now you’re putting these assets into a much more capital disciplined programme.”

Looking at it another way, here are some stats (courtesy of Wood Mackenzie):

• Ten companies will now control more than 6.4mn barrels of oil equivalent a day of the Permian’s 12.1mn boe/d of overall output.

• Six of these will produce more than 700,000 boe/d each — more than some Opec member countries. 

• In the Midland sub-basin, which makes up the eastern part of the Permian (and is significantly more sought-after than the Delaware on the other side), ExxonMobil and Diamondback will control roughly 50 per cent of the acreage.

“I don’t see any signs of companies trying to compete on production growth or anything along those lines,” said Alex Beeker, research director at Wood Mackenzie. “Shareholder payouts and distributions still are the priority — and I don’t really see that changing for the foreseeable future.”

Visually, the transformation is quite stunning. Take a look at this map of the Midland Basin, where much of the dealmaking has focused, put together by my colleagues on the FT graphics desk based on research by consultancy Enverus:

So what . . . ?

The rub of all of this is that when prices jump in the months and years ahead, the US shale patch will no longer act as a safety valve for global consumers. The country will remain the world’s biggest player — and the Permian will continue to grow — but it will not be riding to the rescue when prices surge.

“The new Permian is less volatile, meaning a steadier level of activity,” said Dan Pickering of Pickering Energy Partners.

“If Exxon, Chevron, Oxy, Diamondback, etc are going to have a programme that they just plough through and execute on, they are less likely to accelerate when prices are high, they are less likely to slow when prices are low — and that translates to Opec being more important.”

Power Points

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu and Tom Wilson, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.