Comments: Cautious Pessimism
Authors: Donnelly John 
Published: September 2019

Editor's column
After the oil price downturn, operators placed renewed emphasis on spending discipline, in drilling, project costs, and balance sheets. For some, that was a different metric: return to shareholders over production growth. During and after the prolonged decline in oil prices, which bottomed in 2016, larger operators did become more technologically proficient, increasing the efficiency of existing wells and learning to live with lower oil prices. With anticipation that $40-60/bbl oil might be the norm for years to come, they had no choice. But this was easier for larger companies than smaller independents ramping up shale output in places like the Permian Basin.
This has put many independents in a tough spot. Bankruptcies are on the rise, and the future of unconventional production in the US, while spectacular, has some un answered questions going forward. The number of shale operators filing for Chapter 11 bankruptcy protection continues to grow, the latest being Sanchez Energy and Halcón Resources, both of which filed for protection in mid-August. From the beginning of 2015 to May 2019, 172 North American operators filed for bankruptcy. Many of the bankruptcies occurred in 2015–2016, but there were more in 2018 than 2017. “After years of high growth, the US unconventionals sector has yet to deliver cash flow or returns to investors across the full cycle. To achieve profitability, shale producers will need to transform their organizations and shift their strategic focus from growth to value creation,” consulting firm McKinsey said in a statement last month.
During recent earnings calls, many independents in the unconventional sector sounded a note of pessimism about the current state of the business. US shale operators need to tap the brakes on production growth and focus even more on capital discipline in an oversupplied market, Continental Resources CEO Harold Hamm said at a recent industry conference. “Capital discipline is more important now than at any time I’ve seen it. We can oversupply the market, and we have,” Hamm said.
In August, the International Energy Agency reported that demand growth for oil had hit its lowest level in more than a decade, going back to the recession of 2008. The demand slowdown was driven by fears of another global recession and the ongoing trade dispute between the US and China, which has hurt several industrial and manufacturing sectors. Oil prices have fallen steadily this year, about 20% since April. In a separate report, consultancy Rystad Energy said the oil market was going from “gloomy to gloomier” and questioned whether OPEC and the other major producers that have been reigning in supply since the oil crash could do much more at this point.
But there are bright spots in other parts of the industry. “High-impact” exploration drilling activity increased significantly in the first half of 2019 with 51 exploration wells completed, compared with just 36 in the same period last year, according to Westwood Global Energy Group. Sixteen large discoveries have been made so far this year, with the largest discoveries all being gas at Dinkov (14 Tcf) and Nyarmeyskoye (4.3 Tcf) in the Kara Sea offshore Russia, and Glaucus (4.5 Tcf) in the Eastern Mediterranean offshore Cyprus. The largest oil discoveries were Yellowtail and Tilapia offshore Guyana, according to Westwood. It expects that another 35–40 high-impact exploration wells will be completed by the end of 2019, resulting in more than 85 for the year, a 35% increase from 2018.