There is no doubt the outlook is now quite difficult for indebted shale operators and although it is too early to say with accuracy which companies will be driven out of the game or into bankruptcy, the count will likely be more than in previous years. Oil break even prices for premium acreage can reach less than $25 per barrel for some operators but once less productive acreage is included in a company’s position, the price needed to remain profitable is no less than $40 per barrel.
With the current WTI price at $30 per barrel and with uncertainty around how much lower the price can be, drilling activity will be significantly reduced in the short term, ultimately reducing production. For the rest of 2020 operators are to rethink their development strategies in order to reduce expenditure and focus on their best productive acreage.
Indeed, from a micro perspective things are looking quite difficult and there will certainly be losing companies, however from a macro perspective, the US shale supply has proved that not only it rebalances as needed, but that the producers that remain tend to improve their game. This is due to the dynamism of the unconventional sector in the US where this type of external shock is spread over many players that also include the many equipment and services companies. Operators tend to demand lower prices for services hired and this helps to mitigate the negative impact.
There is no doubt that the USL48 operators are now more challenged to manage their debt and stabilize their free cash flow, however, they can always find the way to adjust to the new reality by a mix of increasing cost efficiencies, improved technology or mergers and acquisitions (M&A) consolidation. More importantly, with available undeveloped acreage and with many operators in the US, shale supply won’t go away any time soon, so whenever prices stabilize and move upwards operators’ growth can resume relatively quickly.