Shale producers showed they could survive low oil prices after the market took a plunge three years ago. Since then, the industry’s resilience has helped push US oil production to record levels but can the smaller shale companies survive the wave of consolidations that is coming?
Such a boom will require enormous amounts of capital. And as investors raise the bar on shale profitability, the best companies – those with the strongest balance sheets – will hold significant advantages in accessing capital markets, while smaller, highly-leveraged players may find themselves shut out of the game altogether.
Expect a sweeping transfer in shale asset ownership to stronger companies through mergers and acquisitions over the next few years.
Such a scenario may provide an opportunity for major oil companies to improve their shale positions, which are relatively weak after a wave of divestments in the early 2000s before independent producers discovered and proved its potential.
“Short-cycle” shale projects – where investments can be ramped up or down in a matter of months depending on commodity price fluctuations and payback periods are quick – are appealing to majors in the current environment. The group has dramatically scaled back investments in expensive, “long-cycle” megaprojects in deep water, oil sands and the Arctic, where they have suffered cost overruns and delays in recent years.
Tax reform knocking the corporate rate to 21% will also spur multi-nationals to put greater focus on their U.S. operations, particularly with at least three years left in the business-friendly Trump administration. Despite the lingering regulatory uncertainty, the geopolitical risk in the United States is still much lower than in other parts of the world, particularly compared to the Middle East.
Larger, well-capitalized independents also stand to gain from industry consolidations, though they shouldn’t grow complacent as they’re not immune from becoming acquisition targets for the majors either, particularly since they hold the best “rock,” as shale producers say.
Restructuring has been predicted many times in the shale sector but has to date never materialized. Assets remain expensive and acquiring the “best rock” requires companies to pay a premium. The major oil companies, with their bureaucratic organizational structures, are unlikely to manage shale assets as well and cost-effectively as nimbler independents, who have the advantage of having acquired their shale acreage years before.
The majors notably fell short with their belated forays into America’s shale plays. The majors have also made headway cutting the breakeven costs for their own megaprojects – their bread-and-butter operations.
Everyone in the oil patch has gotten better at lowering their production costs. Still, America’s shale plays could benefit from a more consolidated approach. A shale sector governed more by majors and top independents, whose primary goal is delivering rising shareholder dividends, instead of unbridled growth, might slow U.S. production gains and help stabilize oil markets. But only to a certain extent – and OPEC can only hope for such an outcome.
SOURCE: Forbes ,
Compiled and Published by GIB KNIGHT
Gib Knight is a private oil and gas investor and consultant, providing clients advanced analytics and building innovative visual business intelligence solutions to visualize the results, across a broad spectrum of regulatory filings and production data in Oklahoma and Texas. He is the founder of OklahomaMinerals.com, an online resource designed for mineral owners in Oklahoma.