Tom Kirkman

Irrational Exuberance Declining? ... Permian Shale Oil Slowing Down

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The U.S. Shale Oil industry is reluctantly waking up to a few doses of reality.  What goes up eventually comes down.  The beer is getting warm at the party and it's getting late.

First up, let's take the gentle nudge approach, in this restrained article:

Here's The Latest Sign That Permian Shale Oil Is Slowing Down

Oilfield services giant Halliburton (HAL) warned on third-quarter earnings Wednesday as customers face "budget exhaustion" while a transport backlog in the Permian Basin hits shale oil stocks.

At the Barclays conference in New York, Halliburton CEO Jeff Miller cited pipeline bottlenecks, a tight labor market and inflation that created a worse-than-expected downturn in the Permian.

... Despite the rally in crude prices, the pipeline crunch has forced producers to take lower prices for their oil than they would otherwise have fetched, hitting shale oil stocks.

As a result, shale producers said last month that they are shifting well completions from the Permian Basin to their other oil assets due to the lack of sufficient pipeline capacity.


Or if you prefer the ice bucket dumped on your head severe reality adjustment, read this:

The Coming Collapse Of U.S. Shale Oil Production

... While the Permian Basin is now the largest shale producing region in the United States, companies are still struggling to make a profit.  For example, the largest producer in the Permian, Pioneer Resources, suffered a negative $248 million in free cash flow during the first half of 2018.  

Pioneer Resources spent $1.6 billion on capital expenditures in the first half of 2018 to increase production by 21,000 barrels per day of oil equivalent.  According to Pioneer’s Q2 Press Release, their Permian oil production increased from 251,000 Boe (barrels of oil equivalent) at the beginning of 2018 to 272,000 Boe in the Q2 2018.  That is one hell of a lot of money to increase production only increase production by a mere 8%.

So, Pioneer continues to spend more money on capital expenditures than they receive from cash from operations.  And the reason for that is the severe decline rate that plagues the shale industry.  If we look at the following chart, we can see just how steep the decline rate was based on 2017 production:


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