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A TIGHTER BELT

Investors are liking the US fracking industry’s new strategy: trying to make money

REUTERS/Anna Driver/File Photo/File Photo
Despite a rapid recovery in the price of oil, drilling activity in the US remains muted.
  • Tim McDonnell
By Tim McDonnell

Climate reporter

Published

The price of oil is up to about $75 per barrel, its highest point since October 2018 and a marked recovery from last year’s pandemic pits, when it briefly went negative and then meandered around $40 for several months.

Usually, a high price inspires a rush of drilling activity. But the number of active oil and gas rigs in the US has made only modest gains. What gives?

The immediate problem is that many of those companies that managed to survive the onslaught of bankruptcies that befell oil producers during the pandemic remain on financial life support.

“These guys ran out of money last year, completely,” said Ed Hirs, an energy economist at the University of Houston. “They’re using what cash flow they can generate right now to keep heart and soul together, not going out and drilling.”

Oil companies have limited cash flow

Two main factors are working against producers’ cash flow, Hirs says. The first is that during the depths of the pandemic, many companies arranged hedging deals on their future output, essentially locking themselves into prices closer to the $40 range as a form of insurance against another crash. Now that prices are higher—thanks to production cuts made over the last year by Saudi Arabia and other OPEC countries, the global rollout of vaccines, and the return of road and air travel—those companies will lose out.

The other factor is that even before the pandemic, the US fracking industry had been largely frozen out of capital markets after more than a decade in which its business model hinged on obsessive expansion, with little in the way of profit to show for it. That, plus the mounting pressure on financial institutions to decarbonize their portfolios, means it’s never been harder for a fracking company to get an affordable loan.

“Without investors supporting them, these guys are going to have to make money on their own,” Hirs adds.

Drilling activity is likely to gather steam

One way to do that is to focus on finishing existing wells that were “drilled but uncompleted,” known in industry parlance as “DUCs.” The number of DUCs nationwide has dropped by a third from mid-2020, according to federal data, a sign that producers want to get the most out of their existing assets. Meanwhile, fracking companies like Devon Energy and ConocoPhillips are working to earn back the confidence of investors by handing over a portion of what profits they’re able to earn in the form of increased dividends and share buybacks.

So far, investors seem pleased: Share prices of many oil companies are going strong compared to the beginning of the year, and the energy sector is by far the best-performing slice of the S&P 500, jumping 44% in the last six months.

Does this signal a permanent shift in fiscal strategy? Karr Ingham, the lead economist with the Texas Alliance of Energy Producers, a trade group, doesn’t think so. If there continues to be money in US shale fields, he believes, sooner or later the urge to expand will re-emerge.

“Ultimately we will see a higher rig count in response to higher prices,” Ingham says. “If that doesn’t happen, it would be the first time in the history of the world.”

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