Oil prices below $50 are simply not going to cut it in the U.S. shale oil patch, Moody's analysts say in a new research note.
and production companies have managed to drive down their costs since
oil prices crashed in late 2014. But Moody's believes it will be
difficult for drillers to cut much deeper, and any reductions will be
offset by a rebound in the prices that oilfield services companies
For that reason, drillers won't be able to make
significant returns on the capital they plow into new production unless
benchmark U.S. West Texas Intermediate crude oil and natural gas prices
cooperate, Moody's said.
"Despite substantially improved cost
structures, E&P companies will be able to generate meaningful
capital efficiency, only if the WTI oil price is above $50 per bbl and
the Henry Hub natural gas price is at least $3.00 per" million British
thermal units, Moody's senior analyst Sreedhar Kona concludes in the
Commodity prices have fallen close to Moody's threshold so
far this year. WTI has averaged $49.34 a barrel, while natural gas
prices were at $3.02 in the first eight months of 2017, the ratings
The analysis comes as U.S. crude recently rose above
$50 a barrel for the first time in four months, hitting a five-month
high of $52.86 on Thursday. The U.S. Energy Department projects oil
prices will average $48.83 next year and $49.58 in 2018.
report also aligns with a renewed focus on financial discipline over
debt-fueled growth among U.S. producers, widely expressed in second
quarter earnings reports. The industry is notorious for its long,
unfruitful effortsto generate positive cash flow.
drillers rely on expensive advanced drilling methods like hydraulic
fracturing. They drill horizontally into shale and then inject water,
minerals and chemicals at high pressure to fracture the rock formation,
allowing oil and gas to flow to the wellhead.
A lot of ink has
been spilled lately over falling break-even costs, the price at which
drillers aren't losing money on producing a barrel of oil. In some parts
of the United States, break-evens have fallen below $40 a barrel as
producers drill and complete wells more efficiently and wring discounts
from oilfield services companies.
But Moody's makes an important
point: Drillers can't just break even on their production. Eventually,
they need to "recover their costs, earn a meaningful return on their
investments, reinvest in further development of their acreage, repay
debt and reward shareholders for the risk and cyclicality associated
with the industry."
Drillers can't do that at break-even costs below $45 a barrel and $3 per mmBtu for natural gas, Moody's says.
based its finding on a study of 37 U.S. drillers. It studied their
operating cash margins and their costs of finding and developing fossil
fuels to determine capital efficiency.
Among the drillers with the
best capital efficiency metrics in 2016 were Antero Resources and Range
Resources. Those near the bottom of the pack were Whiting Petroleum,
ConocoPhillips and Southwestern Energy.