Page 5 - NorthAmOil Week 20 2022

NorthAmOil COMMENTARY NorthAmOil

Equipment, labour and
service costs are rising.

net income of $2.3bn, up from $946mn year help Europe reduce its dependence on Russian
on year, and Diamondback Energy reported oil in the wake of the war in Ukraine.
adjusted net income of $929mn, up from And US oil production is rising, but only
$379mn a year ago. gradually, and at 11.9mn barrels per day it
These figures are just a snapshot of a trend remains below the record high of 13.1mn
seen across all shale regions, both oil and gas. bpd achieved in March 2020, before the pan-
Producers are also benefiting by other measures, demic sent the industry into a new downturn.
including free cash flow. This week, the Finan- Indeed, weekly production even declined to
cial Times cited consultancy Rystad Energy as 11.8mn bpd in the first week of May before
estimating that at current crude prices, shale rebounding the following week, leading to
operators would achieve a combined $180bn speculation that rising costs may be starting
of free cash flow. The newspaper also cited to affect activity.
S&P Global Commodity Insights as saying the
amount of cash generated by operators this year What next?
would be greater than the total earned over the Concerns about rising costs were already being
past 20 years. seen in first-quarter results, with operators issu-
ing warnings about the higher costs of both
Caution equipment and labour, as well as other services.
However, strong results and the expectation of For example, Pioneer warned ahead of its The majority have
more high profits to come as oil prices remain first-quarter earnings release that production
elevated has not stopped shale drillers from costs would come in above guidance. Mean- indicated a desire
proceeding with caution. Only a handful have while, Hess said in late April that it could add to maintain
decided to ramp up spending in response to the $80-100mn to its capital programme amid
oil price increase, while the majority have indi- inflationary pressures and that well costs in the a disciplined
cated a desire to maintain a disciplined approach Bakken play had gone up by 7% y/y. And Coterra
to both spending and new drilling. Energy, which has a mix of oil- and gas-focused approach to both
Indeed, returning cash to shareholders shale assets, has projected that inflation would
through increased dividends and share buy- increase its costs by 15-20% this year. spending and
backs appears to be the priority for many. Given This may not all be bad news, however, and new drilling.
the kind of pressure these companies came analysts have said that current conditions could
under from shareholders towards the end of attract more investor interest after the oil and
the last decade, it is not surprising that they are gas sector had previously fallen out of favour.
hesitant to return to the days of running up high “We believe investors can no longer ignore
debt in a bid to ramp up drilling. the sector’s capital returns, attractive valuations
But ongoing pressure from shareholders to and positive estimate revisions,” a Siebert Wil-
focus on returns is also colliding with a different liams Shank oil and gas analyst, Gabriele Sorb-
kind of pressure – to produce more oil and help ara, told clients last week. “Inflationary concerns
bring down crude and gasoline prices. Among are likely to pivot capital inflows to the resource
those calling for more US oil production is US sector and no sector is better understood than
President Joe Biden, who has also cited a need to fossil fuels for a hedge on inflation.”™

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