​U.S. oil growth heading for major slowdown: IHS Market

Image: Exxon Mobil

A new report from IHS Markit predicts a dramatic shift in U.S. oil production in the near term as developers face the strongest headwinds since the oil price collapse in 2015.

In 2018, U.S. oil production grew by nearly two million bbls/d — an all-time global record — but that is expected to drop to “essentially no growth” in 2021, IHS Markit said.

“This is a dramatic shift after several years where annual growth of more than one million barrels per day was the norm.” vice-president Raoul LeBlanc said in a statement, adding it is “pretty clear that this is a new era of moderation for shale producers.”

The key challenge for producers today is to meet investors’ new focus on return of capital at a time when companies are facing a prolonged period of lower prices and difficult access to financing from capital markets, according to the IHS Markit report.

Exploration and production companies are trading at multiples that are half to one-third of what they were in 2017, and debt markets are unwilling to provide fresh debt for all but the largest shale players, it said.

“The combination of closed capital markets and weak prices are pulling cash out of the system,” LeBlanc said. “Investors are imposing capital discipline on E&P’s by pushing down equity prices and pushing up the cost of capital on debt markets.”

These financial trends will impact operations in turn, IHS Markit said.

“With WTI prices expected, at this point, to average around $50 in 2020 and 2021, IHS Markit forecasts capital spending for onshore drilling and completions to fall by 10% to $102 billion this year, another 12% to around $90 billion in 2020 and another 8% to around $83 billion in 2021—a nearly $20 billion decline in annual spending over just three years.”

Aggravating the situation is that some options for weathering the storm that worked then will not be available this time, the report said.

“Operators were able to outperform the price collapse in 2015-2016 because they were able to vastly outspend cash flow thanks to accommodative debt and equity markets, while at the same time achieving huge leaps in well productivity and capital efficiency,” LeBlanc said. “This time around, capital markets are skeptical and wary, and the scope for further productivity gains is limited.”

The new IHS Markit outlook for oil market fundamentals for 2019-2021 expects total U.S. production growth to be 440,000 barrels per day in 2020 before essentially flattening out in 2021. Modest growth is expected to resume in 2022.

The industry retains the ability to still grow rapidly under the right conditions, the report said.

“IHS Markit analysis shows that a $65 per barrel oil price would provide the ability to post strong volume growth while also providing meaningful returns to shareholders. The crucial tipping point for this new shale era appears to be oil prices somewhere near the mid-$50s—the point where it remains viable to have both some production growth and deliver shareholder returns, the report says.”