High debt, low margins choke shale’s growth despite climbing oil prices

By Sheela Tobben and Alix Steel on 1/6/2021

(Bloomberg) --Don’t count on America’s shale industry to boom once again in response to $50-a-barrel oil and Saudi Arabia’s plan to throttle back its own oil production.

What in previous years might have triggered a knee-jerk reaction by U.S. oil explorers to raise output and grab market share is, this time around, more just an opportunity for them to pay down debt or boost dividends.

Oxy CEO Vicki Hollub
Oxy CEO Vicki Hollub

“Our primary priority right now is to reduce debt,” Occidental Petroleum Corp. Chief Executive Officer Vicki Hollub, who heads one of the largest exploration and production operations in Texas’s Permian Basin, said in an interview with Bloomberg TV on Tuesday. “We’re pretty close to the right production profile for $50 a barrel today because what we’re trying to do is just further improve our margins.”

Saudi Arabia’s surprise decision Tuesday to curb output by 1 million barrels a day in February and March caused oil prices in New York to surge above $50 a barrel for the first time since February, before the pandemic sent oil markets crashing and over 40 explorers went bankrupt. Helima Croft, chief commodities strategist at RBC Capital Markets, described the move as an especially sweet gift for U.S. shale drillers.

But even before the pandemic, Wall Street was growing weary of shale, an industry that had burned through billions of dollars in cash while delivering little in the way of returns for investors. So producers are more likely to use the tailwind from Saudi Arabia to pay back investors as opposed to raising output to capitalize on the rally.

To increase production, “shale will need a sustained price of above $50 a barrel for West Texas Intermediate crude, or probably closer to $60,” said Aaron Brady, executive director for IHS Markit.

Plus, it would take at least three months for shale producers to ramp up production, because that would involve decisions on new drilling and getting well-completion crews together, Brady added.

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