Tortoise's Brian Kessens in S&P Global

Oil rally unlikely to tempt more US E&P spending in 2020, experts say

  • Another $10/b needed to boost drilling: Harold Hamm
  • Budgets, activity seen lower for 2020
  • $70/b-plus said needed for substantive capex change

Houston — Oil prices are the highest they have been in months, but that likely will not tempt most US upstream companies into spending more for 2020, according to two US shale pioneers and other experts, who say prices would need to be substantially higher for E&Ps to loosen their purse strings to further grow their operations.
Crude futures rallied early Friday, with the market factoring in heightened geopolitical tension following a US airstrike in Iraq which killed a leading Iranian general. NYMEX front-month crude rallied $2.42 to $63.60/b, before slipping back below $63/b in afternoon trade.
“The US independent will not increase their capex or rig count due to this event or more serious events in the future,” Pioneer Natural Resources President Scott Sheffield said Friday in response to the price rally. “The industry will generate more free cash flow to return to their shareholders.”
The upstream capital discipline mantra, first launched a couple of years ago, has become more entrenched, as oil producers have streamlined operations to a point where they can meet their production targets, shareholder dividends and balance sheet goals at $50-$55/b WTI levels.
And with 2020 capital budgets for US producers projected to drop roughly 7% to 10%-plus and funding sources tight, investors are pressuring E&P operators to assure profits are returned to shareholders and debt paid down before producers lean more heavily on the drill bit.
Harold Hamm, executive chairman of Bakken driller Continental Resources, said Friday that prices would have to rise more than $10/b to reverse the existing producer sentiment and return rigs to the field.
“A stable price structure of $75/b can easily be sustained in the current US and world economy,” said Hamm, who advises US President Donald Trump on energy issues. He stepped down as Continental’s CEO on January 1.
“I think north of $70 is what’s needed for producers to even entertain the conversation to take their production higher,” Brian Kessens, portfolio manager with energy asset managers Tortoise, said. “Outside of a large move north of $70/b in crude, I don’t think the behavior of the E&P sector is going to change.”
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