The US shale oil revolution has reached a landmark moment, with the sector’s top companies for the first time earning enough cash to cover the cost of new wells. Since the shale oil boom began a decade ago, exploration and production companies have needed a steady inflow of capital to pay for drilling and completing new wells but thanks to the rise in crude prices, many can now finance themselves. The leading producers, which were just about covering their capital spending from their operating cash flows in the final quarter of last year, are now generating significant free cash, according to Wood Mackenzie, the research company.
It’s quite a windfall for a lot of these companies,” said Andrew McConn, of Wood Mackenzie, who noted that the larger US shale oil companies needed a crude price of about $53 a barrel to generate free cash. Benchmark US crude was $68 a barrel on Friday. The shift to self-sustainability is removing one of the key concerns for investors. As crude prices have climbed since June last year, US exploration and companies’ shares, which typically follow the commodity, have lagged behind.
This month, however, they have started to rise. Since the start of April, shares in EOG Resources and Continental Resources are up 11 percent, and for Pioneer Natural Resources they are up 17 percent. From the time the first shale oil test wells were drilled in the US in 2008-09, the industry’s capital expenditure has exceeded its cash from operations, with producers only able to stay in business by attracting hundreds of billions of dollars in financing from bond and share sales and bank loans. From 2008 to 2017, US exploration and production companies raised $293bn from bond sales, according to Dealogic. Another factor that has helped producers turn the corner is the continued improvement in the techniques of horizontal drilling and hydraulic fracturing, which have brought costs down sharply.