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US set for a bumpy ride

The shale patch may face a prolonged road back to health, agree the PE Live 1 panellists

Saudi Arabia’s 2014 attempt to drive US shale out of the market was an abject failure, ultimately leading to it having to make common ground with Russia. But the robustness US producers showed then may not be repeated in 2020.

“The big difference is that, last time around, there was ample capital to finance companies going through restructuring,” says EY’s Brogan. “So, while not all of the companies came through intact, most of the assets did.

“This time around, shale had already become an unpopular investment, at least from private sources. On both the debt and equity side, the capital to keep shale going is not there to anything like the extent it was the last time,” he continues.

Brogan does, though, raise one caveat, should the US government choose to use some rescue funds to assist the shale industry.

“This is a slightly different event to the events of 2014-16” in a US context, agrees Norton Rose Fulbright’s Mayo. US firms made “significant cuts to workforces” over that period and saw “significant numbers of bankruptcies”.

“But some oil producers have had to continue to make cuts since then, because we never saw oil return to pre-2014 prices,” Mayo continues. “A number of US firms were more stretched when the current downturn began than they were in 2014—some early bankruptcies and restructuring just go to bear that out.”

Bad timing

The timing of the price slump could hardly have been worse, says HSBC’s Phillips. “This whole situation is also happening at one of the two points in a year when much of the upstream industry typically goes to renegotiate some of its funding.”

Phillips is also concerned by the numbers from a recent survey conducted by the Dallas Federal Reserve. Respondents reported “the level of WTI to cover operating expenses being in a mid-20s to mid-30s $/bl range”, he says. “And that is just to cover expenses. The WTI [price] needed to support new drilling was more like mid-40s or early-50s.

“With WTI at $40/bl—bear in mind, this was a mid-March survey—30pc of the companies surveyed said they might be out of business within two years, which is a quite staggering number,” Phillips continues.

Staggering, but not necessarily surprising. “Given the cycle we have just been through from 2014 until now, there is less room for efficiency gains—we have done a lot already,” Phillips continues. “And there is less room for simple cost-outs.

“From our viewpoint, even as and when crude recovers, we see the US supply base taking some years to recover, and probably with some ownership changes. The Permian, may be the best place, getting back to where it was in a couple of years’ time. The other resources may take a bit longer. We expect US supply by the end of this year to be significantly lower, and that delta could take a number of years to recover, even with higher crude prices.”

US response

A question paramount in the minds of the PE Live audience was whether the US might join some sort of co-ordinated global supply response. “Texas Railroad Commissioner Sitton has been quite public about potential involvement in Opec+,” notes Mayo.

But, while Texas could lead a possible US initiative, and has “openly discussed proration”, she is unconvinced that the state could do much alone, given that it constitutes less than half of total US production.

But “there are positive and negative impacts of organising large producer groups, particularly when we may be looking to combat a short-term problem,” Mayo warns. And the lawyer is concerned about “potential antitrust issues that may arise through coordination of efforts in an attempt to control pricing and dictate the market”.

With its thousands of independent oil and gas firms, “the US is in a much different situation to a state-owned producer that can unilaterally make a determination that it is going to try to adjust the price,” Mayo concludes.

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