US shale expenditure is set to surge nearly 20 percent next year as the industry recovers from the unprecedented volatility caused by the Covid-19 pandemic.
Expenditure will leap to a predicted $83.4 billion in 2022, up from an expected $69.8 billion this year, a 19.4 percent increase, according to energy research firm Rystad Energy. This figure represents the highest expenditure for the industry since the onset of the Covid-19 pandemic.
Covid-19 proved a major upset for the US shale sector. US shale oil firms were generally highly leveraged at the start of the pandemic, and had some of the higher breakeven figures among global producers as a result of having to service debt. When the pandemic hit and crashed global demand for energy, oil prices plummeted, with West Texas Intermediate prices even turning negative for the first time in history in April 2020, leaving producers having to pay buyers to take excess crude off their hands amid a storage capacity shock.
Now, as the impact of the pandemic on demand has begun to level out, US shale firms are ready to begin investing in production again. Service price inflation is expected to add $9.2 billion of expected year-on-year spending increases, with increased activity accounting for an additional $8.6 billion, according to Rystad. These additional costs are expected to be partially offset by increased efficiency gains driven by additional adoption of simul-frac equal to around $4.2 billion in savings.
“Oil and gas activity and upstream spending in US Land has been exposed to significant volatility in the last two years. Aggressive strategies from private operators in the US shale patch have driven spending this year, but we anticipate significant growth in 2022 from public and private operators alike,” Artem Abramov, head of shale research at Rystad Energy said.
Despite the 20 percent increase in spending, the total spending level for 2022 will still remain significantly below the forecasted amount for the year prior to Covid-19. In November 2019, Rystad estimated total US shale spending for 2020 at $104.9 billion, with 2021 and 2022 placed at $109.7 billion and $119.8 billion, respectively. Instead, once the pandemic took hold, spending in 2020 plunged to $60 billion.
In 2021, public independents mostly maintained their US shale budgets compared to 2020, with a modest increase noted by Rystad in the weighted-average well index. Increased activity was further offset by structural efficiency gains and lower service costs behind actual drilling and completion operations, the agency said.
Private operators, however, moved more aggressively this year and have felt the impact of cost inflation more keenly. This increase in private exploration and production resulted in total US shale capital expenditure growing by around 16 percent in 2021 compared to 2020.
Among the US shale producing regions, Rystad pointing to Permian and Haynesville spending as relatively resilient during 2020’s downturn, with faster structural activity this year. Meanwhile, the Niobrara region saw a deeper increase in spending in 2021 on a percentage basis, and the Appalachia and Eagle Ford regions experiencing minor growth in 2021.
In the Bakken and Anadarko regions, spending declined by between seven and 14 percent in 2021 compared to 2020.
In 2022, the Niobrara, Eagle Ford, and Anadarko regions are expected to beat nationwide average spending growth as a result of increased rig activity expansion in recent months, while the Bakken region is forecast for 19 percent spending growth and the Permian to grow 17 percent.
Rystad also anticipates spending to increase in Appalachia and Haynesville by around 15 percent and 10 percent, respectively.
US shale reinvestment rates hit record low
US shale oil producers hit an all-time low for reinvestment rates in the third quarter of 2021, which resulted in a record free cash flow for the same quarter. Reinvestment rates are expected to fall even lower by the end of 2021, Rystad predicts.
Rystad’s analysis focused on a group of 21 public US shale oil firms, excluding majors that account for 40 percent of expected 2021 output.
The group’s combined reinvestment rate for Q3 2021 was 46 percent, down from 53 percent in the same period in 2020. This figure is still significantly down over the sector’s historical average of over 130 percent.
Reinvestment rates are calculated by comparing shale firm’s oil and gas capital expenditure against their cash flow from operations, Rystad notes that cash flow from operations in Q3 2021 was the strongest since the Q2 2019.
“Such a low reinvestment rate stands out for shale industry observers, especially as the peer group reported a record-breaking free cash flow (FCF) and earnings before interest, tax, depreciation and amortisation (EBITDA) of $6 billion and $16 billion, respectively. But it’s not the end of the reinvestment slide,” Alisa Lukash, vice president for North American shale at Rystad Energy said.
Reinvestment is expected to fall further to 40 percent in Q4 2021, according to Rystad’s analysis. Additionally, among the group surveyed, for the first time since late 2018 net debt dropped below the eight-year average floor of $52 billion, hitting $51 billion in Q3 2021. Leverage ratios have also continued to decline in line with past three quarters, Rystad added.
Meanwhile, dividend payments jumped 70 percent in the group in Q3 2021 compared to Q2 2021. Capital spending control by the shale firms was primarily aimed at deleveraging and increasing stable shareholder support, Rystad said, with stock buyback mostly paused as the market recovers in line with oil price increases.