Frackers Fret As Trump Tweets For Lower Oil Prices (GotBitcoin?)

President’s call for prices to go lower concerns some in U.S. oil patch, who worry companies would have to curb drilling. Frackers Fret As Trump Tweets For Lower Oil Prices (GotBitcoin?)

President Trump’s comments calling for oil prices to keep falling have some American shale drillers seething.

The U.S. is pumping all-time-record levels of oil. But a sharp decline in prices in recent months, continuing Friday with a steep drop that took prices down to nearly $50 a barrel, has begun to threaten shale companies’ profitability and may force some to dial back on growth next year.

In tweets and remarks this week, Mr. Trump has expressed hope that prices will keep falling. “Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!” he tweeted Wednesday. Mr. Trump drew sharp political blowback last week for comments in support of Saudi Arabia after U.S. intelligence officials concluded the Saudi crown prince had ordered the killing of a journalist.

The remarks have frustrated some in America’s oil patch, who say further drops in prices could take a toll on them and hurt the Trump administration’s stated goal of “energy dominance.”

“The American oil and gas producer has shown that our economy doesn’t have to rely as much on foreign sources of oil anymore, but the country needs to realize that higher prices are a part of that equation,” said Kirk Edwards, president of MacLondon Energy, an independent producer in West Texas. “We need a $60 or $70 crude price in order for the business to stay healthy.”

Few industry participants were willing to discuss the president’s remarks publicly, but people at several of the largest U.S. shale producers privately expressed unhappiness. One such executive said Mr. Trump’s tweet Wednesday had frustrated company leaders.

The White House didn’t immediately respond to requests for comment.

Shale companies have begun laying out their capital plans for 2019 and, so far, haven’t broadly curtailed spending. Continental Resources Inc., a large North Dakota producer, has said it would increase production in 2019, but Chief Executive Harold Hamm warned lower prices can always impact capital expenditure.

“You have to weather the storm through the downturn and you hope it will be short-lived,” said Mr. Hamm, who has advised Mr. Trump on energy issues.

While some shale producers are upset about Mr. Trump’s recent comments, many still broadly support his agenda, which has included rolling back regulations unpopular with many companies.

“Clearly this administration has done so much good for the domestic economy and for the oil-and-gas industry,” said Ben “Bud” Brigham, who made hundreds of millions of dollars as an oilman in areas including Texas, New Mexico and North Dakota before starting Atlas Sand Co. LLC, which supplies companies with one of the key materials used in fracking. “But I would encourage the president to cheer on domestic producers to increase their production and not foreign countries.”

While lower oil prices benefit most American consumers, they can harm economies in states with large oil and gas industries. If prices fall much lower, drilling and fracking would likely decline, causing layoffs in the country’s oil basins, said Mr. Brigham. During the last oil downturn earlier this decade, the industry laid off more than 180,000 U.S. workers.

U.S. oil and gas producers have dramatically increased spending over the last two years, spurred by higher oil prices and technological advances that allowed them to produce oil more economically. Frackers spent more than $72 billion in 2017 and are on pace to spend around $100 billion in 2018, according to energy consultant IHS Markit.

But rising stockpiles of U.S. crude oil, coupled with Mr. Trump’s comments thanking Saudi Arabia for lowering prices—by producing more in advance of U.S. sanctions on Iran—have pressured U.S. and global price benchmarks, according to oil and gas analytics firm Drillinginfo.

The pullback comes months after the U.S. surpassed Saudi Arabia and Russia as the world’s largest crude-oil producer and ahead of a potential milestone: The U.S. could soon export more crude oil and petroleum products than it imports. That threshold has already been crossed for natural gas, and some analysts believe it could happen for oil and fuels such as gasoline as soon as next year.

Shale producers largely accept the president’s earlier advocacy, intended to prevent damaging spikes in crude prices, but they are very concerned about his recent remarks, said Robert McNally, president of Rapidan Energy Group, an analysis firm that advises oil-and-gas companies on public policy and markets.

“The president is shifting from protecting the ceiling to delivering a tax cut via indefinitely lower oil prices, and this poses a real risk to shale finance and economics,” said Mr. McNally, who has discussed the issue with energy executives. “Memories of February 2016, when prices went below $30 a barrel, are fresh in the shale sector and among investors.”

In Oil’s Huge Drop, All Signs Say Made in the U.S.A.

Rising U.S. production and inventory, changing policies and a stronger dollar add to pressure on price of crude.

The downward spiral in oil prices is accelerating as a surge in crude production from a turbocharged U.S. petroleum industry runs into weaker global economic growth.

Crude prices slid 7.7% Friday, their largest one-day drop since July 2015, and are now down by nearly a third since the start of October. The U.S. benchmark, West Texas Intermediate futures, closed at $50.42 a barrel—its lowest level in over a year.

Oil traders pointed to a mix of factors for Friday’s selloff. Economic growth outside the U.S. has flagged, raising fears that demand for crude will also decline. In export-dependent Germany, a purchasing managers index hit a four-year low, well below the level economists were expecting.

Saudi Arabia and the Organization of the Petroleum Exporting Countries are inching toward a plan to cut production that would retain official output targets, first set in 2016, but would imply a production pullback because Saudi Arabia is overproducing by nearly 1 million barrels a day.

Investors remain skeptical that the OPEC meeting in Vienna on Dec. 6 will be able to turn the tide on oil supply enough to support prices.

A big reason why: the emergence of the U.S. oil industry as one of the world’s most important players. Ballooning shale production—American output has nearly doubled since the start of 2012—has made the U.S. a key supplier and exacerbated worries about a global glut of crude.

“I never thought I would hear these kinds of numbers coming out of the U.S.,” said Bob Yawger, director of the futures division at Mizuho Securities USA. “This is going to force OPEC’s hand.”

This summer, the U.S. surpassed Saudi Arabia and Russia as the largest crude-oil producer—a title it hasn’t held since 1973, according to the International Energy Agency. Monthly output in the U.S. was a record 11.65 million barrels a day in September and nearly the same amount in October, according to energy consulting firm Wood Mackenzie, while Saudi Arabia’s supply was nearly 11 million barrels a day last month and Russian production stood at 11.4 million a day.

“It used to be the world was divided into OPEC and non-OPEC,” said Daniel Yergin, vice chairman of IHS Markit, which projects the U.S. will be a net exporter of petroleum in the early 2020s. “Now it’s the world of the big three.”

On Top of the World

Surging production has made the U.S. the world’s largest oil supplier in recent months.

In recent weeks, that has shown up in a bumper amount of oil in storage. U.S. crude stockpiles have climbed for nine consecutive weeks. Inventories advanced by 4.9 million barrels in the week ended Nov. 16, and rose more than 10 million barrels the week before, the largest one-week increase since February 2017.

Bottlenecks in getting oil out of the prolific Permian basin in Texas have led to a big divergence in the benchmark prices of oil. The global benchmark, Brent crude, trades for roughly $9 more than West Texas Intermediate, which is harder to get to global markets.

However, the U.S. has continued to pump oil and many expect those hurdles to be cleared next year as new pipelines are built, unleashing even more crude on the rest of the world.

Uncertainty on the geopolitical front has also exacerbated worries about oversupply.

President Trump has signaled a willingness to look past the killing of a prominent U.S.-based journalist in his relations with Saudi Arabia. And the U.S., after months touting strict enforcement of sanctions on Iran, granted more generous waivers than expected for eight governments to buy Iranian oil. This could lead to higher-than-expected supply from the Islamic Republic.

Saudi officials said Mr. Trump pressured the country into ramping up oil production to record levels ahead of the sanctions on Iran’s petroleum industry.

“They are trying to be as cooperative with us as possible,“ said Douglas Hepworth, chief operating officer at Gresham Investment Management LLC, a $7 billion commodities firm with about one-third of its assets in energy. “What triggered the whole thing was everybody in the world moving to full capacity to try and make the world safe for Iranian sanctions.”

The strength of global production now threatens to overwhelm demand. This could pressure OPEC and its allies such as Russia to cut back when the group meets next month in hopes of regaining more direct control of global supply.

Such a combination helped rein in the last oil price rout two years ago—defying skeptics who previously warned OPEC’s grip on world markets had slipped thanks to U.S. shale. In 2016, the cartel teamed up with Russia and a group of like-minded, non-OPEC oil producers. They throttled back hard and stayed disciplined, slowly draining the world of the buildup of inventory that now is starting to slosh around the world again. The big question is whether they can pull off the same sort of deal now, and how long it might take to drain supply again.

Adding to the pressure on oil is a stronger U.S. dollar. Since crude is priced in dollars, it becomes more expensive for foreign buyers when the U.S. currency rises. On Nov. 12, the dollar jumped to its highest level since March 2017, bolstered by expectations of higher interest rates. This could start to hinder global demand, one of the initial drivers that underpinned the recovery in crude.

If the price of oil drops too far, too fast, that could also hurt U.S. producers, especially in the shale patch. Most shale drillers now maintain they can break even at $50 or lower. But the falling prices have begun to eat into their profitability, and some may be forced to curtail spending next year and reduce ambitious growth plans if prices decline much more.

Mr. Trump has expressed hope that oil prices will fall lower in tweets and comments this week. His remarks have upset some shale drillers, who say continued drops could hurt the U.S. fracking industry, and the Trump administration’s stated goals of American “energy dominance,” at a time when the country’s oil output is at all-time highs.

The U.S. broadly is reaping benefits. Consumers are already enjoying lower prices at the gasoline pump. Higher oil production helped the U.S. lower its merchandise trade deficit by nearly $250 billion in 2017 from a decade earlier, according to a recent report from IHS Markit.

As the U.S. has exported more oil and natural gas, the country’s energy trade balance swung into surplus in October, according to data from Bank of America Merrill Lynch.

The fact that the U.S. is exporting more than it imports helps insulate the country from global price swings and raises the stakes for OPEC in its decision whether or not to cut production, analysts said.

“We’re rewriting the rules about how we think about global trade competition and market share,” said Michael Tran, energy strategist at RBC Capital Markets. “There’s no playbook or context given how quick growth has been in the U.S.”

Updated: 11-11-2019

Frackers Prepare to Pull Back, Exacerbating a Slowdown in U.S. Oil Growth

Shale companies change course as financial pressure mounts; “I don’t think OPEC has to worry that much more about U.S. shale growth”.

After pushing U.S. oil and natural-gas production to record levels, some shale companies are doing the unthinkable: They are planning to pump less.

The pullback is sharpest among the country’s largest natural-gas drillers. Several producers, including EQT Corp. and Chesapeake Energy Corp. , have said during third-quarter earnings that they may shrink output next year.

But even more oil-focused shale companies are promising to rein in spending and forecasting slower growth. Diamondback Energy Inc., Callon Petroleum Co. and Cimarex Energy Co. , all active in the Permian Basin in Texas and New Mexico, told investors last week that they were contemplating holding next year’s spending around current levels.

Voluntarily restricting growth is a new dynamic for the industry and reflects a calculus that it is better to spend and produce less while hoping for higher commodity prices. A pullback by oil producers would likely cause U.S. oil production growth, already slowing this year, to flatten further in 2020. Natural-gas companies, meanwhile, are attempting to whittle down a glut that has driven prices to multiyear lows.

“I don’t think OPEC has to worry that much more about U.S. shale growth long term,” Scott Sheffield, chief executive of Pioneer Natural Resources Co., recently told investors.

The belt tightening comes as many shale companies are under financial pressure to produce returns as their access to capital constricts. While some generated positive free cash flow during the third quarter, the industry has a long way to go to win back investors, who have grown weary of its lackluster returns.

Shale producers expect to spend about 17% less in 2020 than they did this year, according to a Cowen & Co. analysis of 14 companies that have provided spending guidance. Eleven of the 14 plan to cut spending next year.

Among them is Pittsburgh-based EQT, the country’s largest natural-gas producer, which plans to spend roughly $400 million less next year and said last week its production could decline slightly. Chief Executive Toby Rice said spending could fall another 30% after 2020, citing lower gas prices.

“I think it’s pretty clear there was just too much supply,” Mr. Rice said in an interview. “What’s being rewarded by investors right now is not production growth at all costs.”

Natural-gas prices averaged $2.41 per million British thermal units from April through September, the lowest level in decades, according to consulting firm RBN Energy. Most analysts believe prices will remain low for years.

Bank of America last month lowered its outlook for gas prices in 2020 to $2.35, down from $2.60 and below the price at which drilling is profitable in many regions.

Chesapeake, the shale drilling pioneer co-founded by the late wildcatter Aubrey McClendon, said Tuesday that it plans to slash spending as well as drilling and fracking activity by about 30% next year, resulting in lower natural-gas output.

The Oklahoma City-based company has struggled with hefty debt for years and warned in a securities filing that it may not be able to remain a going concern if it cannot sufficiently reduce its leverage to comply with a credit agreement. Chesapeake’s shares plunged more than 40% to 91 cents in the two days following its disclosure.

Share Your Thoughts

How do you expect shale companies’ profits to fluctuate in the next year, if at all? Join the conversation below.

Chief Financial Officer Nick Dell’Osso Jr. told investors that the company aims to reduce its debt but could ask its bank group for a waiver.

For companies that predominantly drill for oil, the current budget cuts reflect their limited ability to borrow money as much as they do crude prices, said Raoul LeBlanc, an executive director at IHS Markit. Oil prices have hovered around $60 a barrel for much of 2019 but are a far cry from the most recent bust, when they fell below $30 a barrel.

A row of pump jacks in Midland, Texas, operated by Diamondback Energy, which is among a number of energy companies considering holding back spending next year.

After pushing U.S. oil and natural-gas production to record levels, some shale companies are doing the unthinkable: They are planning to pump less.

“I don’t think OPEC has to worry that much more about U.S. shale growth long term,” Scott Sheffield, chief executive of Pioneer Natural Resources Co., recently told investors.

Drilling Decline

The number of active drilling rigs has fallen, even as larger companies continue to drill.U.S. rig countSource: Enverus*BP, Chevron, Conoco, Equinor, Exxon, Shell, Total.

“I think it’s pretty clear there was just too much supply,” Mr. Rice said in an interview. “What’s being rewarded by investors right now is not production growth at all costs.”

Bank of America last month lowered its outlook for gas prices in 2020 to $2.35, down from $2.60 and below the price at which drilling is profitable in many regions.

How do you expect shale companies’ profits to fluctuate in the next year, if at all? Join the conversation below.

Chief Financial Officer Nick Dell’Osso Jr. told investors that the company aims to reduce its debt but could ask its bank group for a waiver.

“These guys don’t have the ability to borrow anymore,” Mr. LeBlanc said.

IHS forecasts total U.S. oil production to increase by 440,000 barrels a day in 2020 before essentially flattening out in 2021, even as major oil companies such as Exxon Mobil Corp. and Chevron Corp. ramp up in shale basins. In 2018, oil production grew by roughly 2 million barrels a day.

Mark Papa, chief executive of Centennial Resource Development Inc., echoed that prediction, saying last week that U.S. shale will be in what he called a “growth-challenged environment” for the next decade.

“We are seeing a clear turning point, in what the U.S. oil contribution is going to be into the global marketplace,” Mr. Papa said in an interview.

Diamondback Energy, a Permian-based driller, is one of the few shale companies to generate a positive return for shareholders over the past five years. The company’s shares fell 14% Wednesday after reporting during third-quarter earnings that its oil output fell 2% from the second quarter, even as it generated more natural gas.

The company also said it plans to hold spending relatively flat next year. At that outlay level, Diamondback thinks it can increase production by at least 10%.

Chief Executive Travis Stice told investors that he expects the number of active drilling rigs in the U.S. to continue to decline as investors demand that companies spend within cash flow and restrict access to outside money. The number of active rigs has dropped by 296 so far this year, a 26% reduction, according to data analytics firm Enverus.

“Expectations for 2020 U.S. production growth need to recalibrate lower,” he said.

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