US shale production likely to increase further as high oil prices boost cash flows

Supply concerns have been driving the growth in oil prices since Russia began its invasion of Ukraine in February

A well site in the Eagle Ford Shale oilfield in Texas. Reuters

US shale oil production is likely to increase further as higher oil prices have provided healthy cash flows to support producers' growth even as global oil demand continues to rise.

Excluding the impact of interest and tax expenses on free cash flow — cash from operations after paying for capital expenditure — the cash per barrel of oil required for shale companies increased to $34 per barrel in the first quarter of 2022 from $23 per barrel in the first quarter of 2021, Saudi bank Al Rajhi Capital said in a report.

However, that remains lower than the $51 per barrel required in the first quarter of 2020, “providing enough cushion to boost the production levels amid higher oil prices”.

Supply concerns have been driving oil prices higher since Russia's military offensive in Ukraine began in February.

Brent, the benchmark for more than two thirds of the world crude, rose to a notch under $140 a barrel in March. It has given up some gains but is still trading near or just above $120 a barrel. West Texas Intermediate, the gauge that tracks US crude, has also posted strong gains and is currently trading at around $115 a barrel.

Both benchmarks are up more than 70 per cent since last year as developed economies recover from the coronavirus pandemic, while Russia's military offensive continues and the EU aims to ban most Russian oil imports by the end of this year.

All the US shale companies monitored by Al Rajhi reported a “significant improvement” in net profits in 2021/2022, mainly due to healthy demand and higher oil prices, the report said.

The average return on assets also improved to 12.8 per cent in the first quarter of 2022 from 10.7 per cent in the fourth quarter of 2021 and -3.1 per cent in the first quarter of last year.

“Accordingly, the stock performance of all the shale companies posted strong returns in 2021 as well as in 2022 year-to-date,” the report said.

While the total capex of the US shale producers declined roughly by 44 per cent on an annual basis in 2020, the trend reversed in 2021 with the cumulative capex increasing 27 per cent, although it remains lower than 2019 levels.

Meanwhile, their aggregate debt declined about 12 per cent year-to-date, according to Al Rajhi.

“Rising oil prices helped US shale producers to bring down the debt burden near to their pre-Covid levels in 2022, proving more room to increase the capex,” the report said.

“Further, a slowdown in DUC [drilled and uncompleted] wells reduction may encourage shale producers to increase their capex spending, implying higher production going forward.”

The report said that overall oil supply is gradually increasing.

The inventory of the Organisation for Economic Co-operation and Development (OECD) countries as a percentage of global demand has “slightly increased in the last few months” and is at 7.4 per cent as of May 2022, after touching a low of 7.1 per cent in December 2021, Al Rajhi said.

It is forecast to reach 7.7 per cent by December 2023, according to the Energy Information Administration, although it will remain below the five-year average of around 8 per cent during the pre-Covid period of 2015-2019, the report said.

Going forward, rising Opec+ production, which is expected to surge by 2.6 million barrels per day this year according to the International Energy Agency, a likely recovery in US shale production and a possible slowdown in oil demand may further increase inventory levels, Al Rajhi said.

However, the EU's plans to ban 90 per cent of its imports of Russian crude and oil products over the next six to eight months may offset the incremental supply to some extent.

“Considering all these factors, we expect oil prices to remain mostly firm with a limited upside going forward,” the Saudi bank said.