US Shale refuses to reinvest despite record cash flow

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Reinvestment rates among U.S. shale oil producers hit an all-time low in the third quarter of 2021, resulting in record free cash flow for the quarter, and are expected to decline even further by year-end according to a report. Rystad Energy analysis. The analysis focused on a peer group of 21 U.S. public shale oil producers, excluding majors, which together account for 40% of production planned for 2021.

The peer group’s combined reinvestment rate in Q3 2021 was 46%, up from 53% during the same period in 2020 and well below the historical average of over 130%. The reinvestment rate is calculated by comparing the oil and gas investments of shale producers to their operating cash flow (OFC). The last quarter’s CFO was the strongest since the second quarter of 2019.

The analysis shows $ 7 billion in spending under-spending by shale producers in the third quarter of 2021, comparing oil and gas investments with the CFO. Operators managed to slightly increase quarterly peer group investment in the third quarter of this year to $ 5.9 billion, from $ 5.3 billion in the previous quarter, while further increasing the CFO to $ 12.8 billion. of dollars. All but one operator balanced spending in the third quarter of this year, reaching a new level of industry-wide cash-balancing.

“Such a low reinvestment rate stands out among shale industry watchers, especially as the peer group reported record free cash flow (FCF) and earnings before interest, taxes, depreciation and amortization ( EBITDA) of $ 6 billion and $ 16 billion, respectively. . But this is not the end of the reinvestment slide, ”said Alisa Lukash, vice president for North American shale at Rystad Energy.

Rystad Energy’s projections show that reinvestments will fall further to 40% in the fourth quarter of 2021. In addition, for the first time since the end of 2018, the group’s combined net debt fell below the eight-year average floor of 52 billion. dollars, to settle at 51 dollars. billion for the third quarter. In addition, debt ratios continued to decline steadily, as in the past three quarters.

Third quarter results show that several large independent operators increased their spending in line with another financially strong quarter, in part due to the strong recovery in West Texas Intermediate (WTI) crude prices. As expected, operators have started reporting cost inflation of 7% to 15%, with the bulk of the impact expected in early 2022. However, this is expected to be absorbed by improving the productivity of wells and efficiency of capital in most cases.

Combined third-quarter net income for the peer group was $ 5.3 billion, double the income realized in the second quarter of 2021 and significantly higher than the sizable losses of $ 6 billion and $ 2 billion. $ 1 billion in the third and fourth quarters of 2020, respectively. EBITDA, meanwhile, rebounded to $ 16.3 billion in the third quarter of this year, a level never seen before. FCF in the peer group was $ 5.6 billion, an increase of $ 500 million from the previous quarter and more than double the $ 2.5 billion seen in the last quarter of the year last.

Dividend payments jumped 70% for the peer group in the third quarter of this year compared to the second quarter. In comparison, the actual dividend / capex ratio increased to 26% from 17% in the previous quarter. Increased control of capital spending by industry was aimed at reducing leverage and securing stable shareholder support. Share buybacks were mainly halted as the market recovered naturally with the increase in the price of WTI. However, a few companies (CLR, FANG, PDCE) initiated buybacks for an amount of $ 200 million.

For the first time since late 2018, the peer group lowered its combined net debt below the eight-year average low of $ 52 billion, reporting $ 51 billion for the third quarter of this year. Many operators mentioned revised hedging plans for 2022 due to lower expected leverage. Both financial leverage ratios – total debt to assets and total debt to equity – have steadily declined over the past three quarters. Despite more robust stock prices leading to an increase in equity in 2021, the decline in leverage ratios was partly offset by constant debt issuances, triggered by merger and acquisition opportunities in the shale sector.

By Rystad Energy for Oil Octobers

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