Texas Shale Is Big Winner as OPEC Deal Brightens Oil Outlook

  • U.S. oil companies add more than $80 billion in value
  • Permian could add 150 rigs to fleet next year: analyst

Shale Oil Gets a Helping Hand From OPEC Agreement

The U.S. shale industry, gutted by 2 1/2 years of bankruptcies, writedowns, credit downgrades and layoffs, is poised to step back from the brink, thanks to an old enemy: OPEC.

Abandoning a policy that sought to starve shale explorers and other high-cost drillers into submission, the Organization of Petroleum Exporting Countries relented on Wednesday and agreed to curb output by 1.2 million barrels a day. Other producing nations that aren’t cartel members also signaled plans to cut back by as much as 600,000 barrels, OPEC said.

The deal could boost prices through at least the first half of 2017, according to Chris Kettenmann, chief energy strategist at Macro Risk Advisors. The result: U.S. shale fields could raise the amount of crude produced within four months, said Antoine Halff at Columbia University’s Center on Global Energy Policy. First to pounce should be drillers in the Permian Basin of Texas and New Mexico, home to gushers prolific enough to spur a recent land rush.

If the deal holds, “U.S. oil production growth is all but guaranteed to return in 2017,” said Joseph Triepke, founder of Infill Thinking, a Dallas-based oil research firm, and a former analyst at Citadel LLC’s Surveyor Capital unit. “All U.S. tight-oil plays will benefit, but none more than the Permian, where we estimate as many as 150 rigs could be reactivated next year.”

The Paris-based International Energy Agency was slightly less optimistic than Halff, with Executive Director Fatih Birol saying Thursday that it may take shale explorers about nine months to ramp up production significantly.

Crude climbed 2.6 percent to $50.72 a barrel at 9:46 a.m. on the New York Mercantile Exchange, extending Wednesday’s 9.3 percent gain after the OPEC agreement was disclosed. Immediately after the news, investors pushed energy companies into the top 18 spots on the Standard & Poor’s 500 index, swelling the U.S. oil industry’s market value by $81.3 billion in a single day. 

Oilfield Relief

Some of the best performers were those hardest hit by the downturn that began in mid-2014 and accelerated five months later when OPEC declined to reduce output. California Resources Corp. jumped by 44 percent Wednesday, while Halliburton Co., an oilfield-services company, climbed as much as 15 percent, its biggest intraday advance since 2008.

Oilfield servicers that provide everything from $700 million floating rigs to the sand used by frackers have contributed the largest chunk of more than 350,000 oil-industry layoffs globally during the two-year downturn. More than 100 oil-service companies in North America have gone bankrupt.

Shale pioneer Harold Hamm, an energy adviser to President-Elect Donald Trump, predicted as far back as 2014 that OPEC would crack before the shale drillers. On Wednesday, Hamm found himself $3.1 billion richer as Continental Resources Inc., the company he leads, soared 23 percent as his prediction came true.

Greater Efficiency

“Certainly, it was intended to put a lot of us out of business," Hamm said of OPEC’s original open-the-spigots strategy, during a CNBC interview Thursday. “But that didn’t happen. We’ve gotten a lot more efficient."

Hamm said Continental had doubled the efficiency of its drilling operations since 2014 and predicted the U.S. has the capacity to more than double oil output to 20 million barrels a day. He said such a move would have to be done over time in a “systematic" way.

“The key here is not to get too much production back in and oversupply the market or prices collapse and that’s not good for anybody," Hamm said.

The OPEC deal “is real and it is significant,” said Andrew Slaughter, executive director of Deloitte LLP’s Deloitte Center for Energy Solutions in Houston and a former Royal Dutch Shell Plc executive. “Even if they don’t deliver the full 1.2 million-barrel cut, it accelerates the inventory drawdown.”

Financial Hedges

Over the next few months, drillers will probably take advantage of the price bump, moving to lock in profits on future production with financial hedges, according to Halff, the director of global oil-markets research at Columbia and a former chief oil analyst at the International Energy Agency.

Not everyone sees only upside. Natural-gas producers may be victimized, said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. As oil drilling ramps up, more gas will flow out of the ground along with it, he said, threatening to derail a rally that pushed U.S. prices for the furnace and factory fuel to a two-year high.

“These guys will drill more, and you are going to get that extra gas at an inconvenient time,” Schenker said. “It’s bearish for U.S. gas for the next three- to nine-month window.”

Other analysts suggested OPEC may have a deeper motive, pushing a bump now but looking to drive down the future price of oil. That would hinder shale producers from getting financing for drilling based on the prospect of rising prices, said Michael Roomberg, who helps manage $7.5 billion at Miller Howard Investments Inc. in Woodstock, New York.

‘Clever Strategy’

“The six-month term of the deal seems like a clever strategy designed to limit upside in the forward curve which will inhibit some market-share gains by U.S. shale while at the same time increasing current OPEC revenue,” Roomberg wrote in an e-mail.

Others preached caution. Investors should avoid “sharp recovery hype," Matt Marietta, a Stephens Inc. analyst in Houston, told clients in a research note Wednesday.

“We reiterate our view that structurally oversupplied crude markets will take more time to balance," Marietta wrote. “The math suggests an ongoing imbalance is likely to persist well into 2017, even with an OPEC cut, and no U.S. growth."

The strength of the deal will also depend on whether all parties deliver on their commitment. Saudi Arabia and its Gulf allies, the U.A.E. and Kuwait, have traditionally stuck to their cuts, but some others haven’t, particularly when prices are low. Any doubt in the market could once again see prices come under pressure.

Price Forecast

Moody’s Corp., for one, isn’t changing its oil-price forecasts for next year. "OPEC agreements are difficult to implement and difficult to enforce," wrote Terry Marshall, a Moody’s senior vice president, in a report to investors.

Mostly, though, analysts outlined consequences from OPEC’s agreement that will be positive and vast. For the global energy industry, which has endured the most painful downturn in a generation, the deal means companies from Exxon Mobil Corp. in the U.S. to Total SA in France may loosen their belt-tightening while countries that depend on oil for revenue may finally see an end ahead to their struggles.

Latin American producers including Columbia’s Ecopetrol SA and Brazil’s Petroleo Brasileiro SA will see pretax earnings rise 3 percent and 2 percent, respectively, for every $1 increase in oil prices, Bank of America Merrill Lynch analysts said in a note to clients. Canadian oil-sands producers, which have some of the most expensive production in the world, could also gain.

The OPEC announcement “is certainly near-term positive,” said Newfield Exploration Co.’s Chairman and Chief Executive Officer Lee Boothby in a Bloomberg Television interview. “As you move up the price curve and you get more confident of the outlook for future pricing, we’ll be able to add activity as cash flows grow.”

Before it's here, it's on the Bloomberg Terminal.