U.S. shale oil plays are “riding the edge of profitability” at current prices and the industry faces a significant slowdown in fracking activity if crude falls below $50 a barrel for a sustained period, according to BloombergNEF.
The majority of American shale wells make money based on the $51.45 average futures price, or “strip,” for West Texas Intermediate crude over the next two years, BNEF analyst Tai Liu said in a report Thursday.
But he added that the historical floor price for U.S. oil of $45, which in the past has been based on so-called half-cycle drilling costs, is likely to rise to $50 as investors use different metrics.
“These firms are now being judged by their ability to generate free cash flow,” BNEF said of drilling companies. “Free cash flow sets a higher bar than half-cycle costs from a break-even perspective.“
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