Frackers to Stand Pat, Reap Profits After Attacks on Saudi Oil
Large shale producers aim to show financial discipline after losing investor support
Shale producers plan to use the attacks on Saudi facilities as a chance to regain investor support.
By Rebecca Elliott and
Christopher M. Matthews
Updated Sept. 16, 2019 5:33 pm ET
Major U.S. shale companies aren’t planning to fill the void in global crude supplies left by an attack on the heart of Saudi Arabia’s top oil facilities.
Instead, producers such as Pioneer Natural Resources Co. hope to reap the benefits of the oil-price increase caused by the disruption in global supplies, and use the opportunity to regain investor support after delivering poor financial results and spending beyond their means.
“There will be no intention to add rigs over and above our original plan,” Pioneer Chief Executive Scott Sheffield said Monday.
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He added that shareholders have told him they would sell the stock if Pioneer, one of the top drillers in the Permian Basin of West Texas and New Mexico, added more rigs than planned. “That’s how disciplined they want everybody to be,” he said.
Many shale companies have pulled back production over the last year amid investor pressure to cut spending. Changing course wouldn’t be well-received by investors, said Kevin Holt, chief investment officer of U.S. value equities at Invesco Ltd.
“If you do, you’re going to get your head handed to you,” Mr. Holt said.
Driven by shale companies, the U.S. became the world’s largest oil producer earlier this year, reaching a record of more than 12 million barrels a day. Shale now accounts for about 8 million barrels a day, or roughly 10% of total global production.
Continental Resources Inc. Chief Executive Harold Hamm said the attacks underscore the U.S. shale industry’s importance to world oil supplies. In years past, large production disruptions have sent oil prices soaring to more than $100 a barrel.
“While the current situation should prove to be temporary, it drives home the need and importance for an energy-independent America, particularly with crude oil production and supply,” said Mr. Hamm, who has advised President Trump on energy matters.
The strikes on Saudi Arabia’s oil infrastructure have led to a production shutdown on a scale the world hasn’t seen for decades. It could have long-lasting consequences for global markets and politics. Photo: Planet Labs Inc via AP
The disruption jolted shale stocks Monday, with shares of Continental rising roughly 22%, Pioneer more than 6%, Devon Energy Corp. 12% and Whiting Petroleum Corp. 49%. It weighed on shares of U.S. fuel makers. American refiners source about 3% of their oil from Saudi Arabia, according to Tudor, Pickering, Holt & Co., and generally suffer as oil prices rise, tamping down consumer demand for gasoline and diesel.
Shares in New Jersey-based PBF Energy Inc. fell 9% on Monday. The company buys about 12% of its oil from Saudi Arabia, according to Tudor, Pickering, Holt & Co.
While shale producers technically have the capacity to scale up if needed, their practical ability to fill a short-term supply shortfall may be limited. Shale production has begun to slow modestly this year as companies respond to investors’ demands to rein in spending.
U.S. oil production increased by less than 1% during the first six months of the year, Energy Information Administration data show, down from roughly 7% growth over the same period last year. The Energy Department cut its U.S. production-growth forecast for 2019 in September by 100,000 barrels, to an average of 12.2 million barrels a day.
It would likely take several months of higher prices to spur shale companies to boost production, according to Goldman Sachs . Shale output would increase if global benchmark oil prices were to surpass $75 a barrel, due to a loss of barrels following the Saudi strike, for more than three months, the bank estimated in a research note. The impact of outages thus far, while dramatic, hasn’t reached those levels, with the price of Brent crude closing more than 14% higher to $69.02 on Monday—its largest single-day gain in more than a decade.
Houston-based producer Paloma Resources LLC planned to capitalize on the oil-price increase Monday morning by hedging a greater portion of its oil output, President Chris O’Sullivan said.
“We’re looking at this as an opportunity to capture a short-lived, meaningful bump,” Mr. O’Sullivan said, adding that the private company doesn’t expect to adjust its drilling plans, which are difficult to change quickly.
Kirk Edwards, president of MacLondon Energy, an independent producer in West Texas, said shale companies would take a wait-and-see approach before deploying more drilling rigs. If companies do decide to increase activity, there will be a lag time because many of the service companies that drill and complete wells for producers have shed staff and equipment this year, he said.
Producers in the Permian Basin, the country’s most active drilling region, need oil prices around $65 a barrel to be profitable, according to Mr. Edwards. For most of the year, prices have remained below $60, straining companies’ balance sheets.
“Man, this is the shot in the arm they needed, just at the right time,” he said.