By Rebecca Elliott and Christopher M. Matthews
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (November 12, 2019).
After pushing U.S. oil and natural-gas production to record
levels, some shale companies plan to pump less.
The pullback is sharpest among the country's largest natural-gas
drillers. Several producers, including EQT Corp. and Chesapeake
Energy Corp., have said during third-quarter earnings that they may
shrink output next year.
But even more oil-focused shale companies are promising to rein
in spending and forecasting slower growth. Diamondback Energy Inc.,
Callon Petroleum Co. and Cimarex Energy Co., all active in the
Permian Basin in Texas and New Mexico, told investors last week
they were contemplating holding next year's spending around current
levels.
Voluntarily restricting growth is a new dynamic for the industry
and reflects a calculus that it is better to spend and produce less
while hoping for higher commodity prices. A pullback by oil
producers would likely cause U.S. oil production growth, already
slowing this year, to flatten further in 2020. Natural-gas
companies, meanwhile, are attempting to whittle down a glut that
has driven prices to multiyear lows.
"I don't think OPEC has to worry that much more about U.S. shale
growth long term," Scott Sheffield, chief executive of Pioneer
Natural Resources Co., recently told investors.
The belt tightening comes as many shale companies are under
financial pressure to produce returns as their access to capital
constricts. While some generated positive free cash flow during the
third quarter, the industry has a long way to go to win back
investors, who have grown weary of its lackluster returns.
Shale producers expect to spend about 17% less in 2020 than they
did this year, according to a Cowen & Co. analysis of 14
companies that have provided spending guidance. Eleven of the 14
plan to cut spending next year.
Among them is Pittsburgh-based EQT, the country's largest
natural-gas producer, which plans to spend roughly $400 million
less next year and said last week its production could decline
slightly. Chief Executive Toby Rice said spending could fall an
additional 30% after 2020, citing lower gas prices.
"I think it's pretty clear there was just too much supply," Mr.
Rice said in an interview. "What's being rewarded by investors
right now is not production growth at all costs."
Natural-gas prices averaged $2.41 per million British thermal
units from April through September, the lowest level in decades,
according to consulting firm RBN Energy. Most analysts believe
prices will remain low for years.
Bank of America last month lowered its outlook for gas prices in
2020 to $2.35, down from $2.60 and below the price at which
drilling is profitable in many regions.
Chesapeake, the shale drilling pioneer co-founded by the late
wildcatter Aubrey McClendon, said that it plans to slash spending
as well as drilling and fracking activity by about 30% next year,
resulting in lower natural-gas output.
The Oklahoma City-based company has struggled with hefty debt
for years and warned in a securities filing that it risks
defaulting if it cannot sufficiently reduce its leverage to comply
with a credit agreement. Chesapeake's shares plunged more than 40%
to 91 cents in the two days following its disclosure.
Chief Financial Officer Nick Dell'Osso Jr. told investors that
the company aims to reduce its debt but could ask its bank group
for a waiver.
For companies that predominantly drill for oil, the current
budget cuts reflect their limited ability to borrow money as much
as they do crude prices, said Raoul LeBlanc, an executive director
at IHS Markit. Oil prices have hovered around $60 a barrel for much
of 2019 but are a far cry from the most recent bust, when they fell
below $30 a barrel.
"These guys don't have the ability to borrow anymore," Mr.
LeBlanc said.
IHS forecasts total U.S. oil production to increase by 440,000
barrels a day in 2020 before essentially flattening out in 2021,
even as major oil companies such as Exxon Mobil Corp. and Chevron
Corp. ramp up in shale basins. In 2018, oil production grew by
roughly 2 million barrels a day.
Mark Papa, chief executive of Centennial Resource Development
Inc., echoed that prediction, saying last week that U.S. shale will
be in what he called a "growth-challenged environment" for the next
decade.
"We are seeing a clear turning point, in what the U.S. oil
contribution is going to be into the global marketplace," Mr. Papa
said in an interview.
Diamondback Energy, a Permian-based driller, is one of the few
shale companies to generate a positive return for shareholders over
the past five years.
The company's shares fell 14% Wednesday after reporting during
third-quarter earnings that its oil output fell 2% from the second
quarter, even as it generated more natural gas.
The company also said it plans to hold spending relatively flat
next year.
At that outlay level, Diamondback thinks it can increase
production by at least 10%.
Chief Executive Travis Stice told investors that he expects the
number of active drilling rigs in the U.S. to continue to decline
as investors demand that companies spend within cash flow and
restrict access to outside money.
The number of active rigs has dropped by 296 so far this year, a
26% reduction, according to data analytics firm Enverus.
"Expectations for 2020 U.S. production growth need to
recalibrate lower, " Mr. Stice said.
Write to Rebecca Elliott at rebecca.elliott@wsj.com and
Christopher M. Matthews at christopher.matthews@wsj.com
(END) Dow Jones Newswires
November 12, 2019 02:47 ET (07:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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