In 2018, the U.S. onshore oil industry will enter a third year of recovery.

The industry has learned a great deal about how to do more with less, because this cyclical recovery has occurred with oil prices averaging at just half of prior highs.[1]

As the industry plans for the year ahead, there is a distinct shift in tone. The overarching theme of the 2018 budget season has been a focus on returns, capital discipline and spending within cash flow.

This is new and different as the shale industry is notorious for outspending cash flow and placing growth above all other priorities.

We used Alpha Sense to run a search on annual debt totals, and used the Industry and Sources filters to quickly screen hundreds of thousands of oil industry filings for about 50 publicly traded shale producers. The research shows the remarkable trend of a fast-rising mountain of debt.

Sources: Company filings, AlphaSense; InfillThinking.com[2]

Total outstanding debt for shale exploration and production (E&P) firms topped $200bn in 2015, up from less than $50bn when the shale gas revolution was in its infancy, and up more than $100bn in just 7 years. With the shift in focus to tight oil drilling from shale gas (in basins like the Eagle Ford, Bakken and Permian starting around 2009), debt has soared to new heights.

Today, the shale industry seems to be realizing that their debt mountain can’t grow forever. More than one shale CEO has sounded almost apologetic for projecting growth during recent earnings calls.

From my review of the E&P transcripts captured by AlphaSense over the past couple of months, it has become clear that Wall Street has lately been asking management teams about cash return, capital discipline and cash flow.

I ran a search in AlphaSense for U.S. E&P transcripts mentioning the terms returns focused OR returns focus. AlphaSense generated a staggering trend chart revealing the magnitude of the inflection in capital discipline references by the E&P industry.

In spite of this big inflection in tone, I’m forecasting that U.S. shale investment will rise on the order of 20% this year. Industry consensus and preliminary budget announcements anticipate only a 10 – 15% increase in capital deployment in 2018.

Why the Difference?
Oil prices have risen to the highest level in several years (over $55 / barrel) even as shale well costs have come down to new lows. While companies are telling the market they are focusing on returns and fiscal conservatism, the economics of capital deployment in shale are better than they have been in half a decade.

This creates an interesting business conundrum for 2018. Will the industry return cash to shareholders and pay down debt or invest in growth because the economics are more compelling than they have been in a long time?

If oil prices hold their ground and drift higher, then 2018 will pose a real test of willpower for investors and operators.

For now, we are taking the over on shale E&P spending expectations until the industry proves that the trend chart above is more than just talk and is a real behavior shift. In this context, 2018 promises to be another solid growth year for U.S. oilfield activity despite fears that newfound capital discipline will carry the day.

Sources:
1. Bloomberg Oil Price Chart
2. InfillThinking.com

Gain a competitive edge and improve your research process with AlphaSense, the “Google” for Research Professionals. Get Started Free.