Parallels are obvious with Canadian plays. Calima show us the money.........

U.S. shale companies enjoy 'tsunami of cash' on high oil prices

Operators will rake in about US$180 billion of free cash flow this year at current crude prices

Author of the article:

Financial Times

Derek Brower in New York

Publishing date:

May 17, 2022 • 5 hours ago • 3 minute read •

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A Chesapeake Energy Corp. natural gas rig in the North Texas Barnett Shale bed rock deposit.Photo by Matt Nager/Bloomberg News files

America’s shale oil companies are enjoying a cash bonanza, as soaring oil prices and months of capital restraint transform the fortunes and balance sheets of a sector once notorious for debt-fuelled drilling sprees.

Operators will rake in about US$180 billion of free cash flow — operating income minus capital and maintenance outflows — this year at current crude prices, according to research company Rystad Energy. That compares to huge losses amassed during a decade of fast supply growth that crashed to a halt just before the pandemic.

And the amount of cash generated by operators this year will be greater than the total earned over the past 20 years, according to S&P Global Commodity Insights.

“It’s a tsunami of cash,” said Raoul LeBlanc, head of S&P’s North American oil and gas division. “The companies have almost finished the balance sheet repair.”

The shale profit surge has brought a recovery in operators’ equity prices, with U.S. oil and gas producers’ shares defying a broader market sell-off this year.

It comes as Russia’s invasion of Ukraine has driven up oil and gas prices, prompting calls from the White House for shale operators to drill more wells.

The number of rigs in operation has picked up in recent months, led largely by private companies, but oil output of 11.8 million barrels a day remains well below the 13 million b/d peak from before the pandemic.

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Shale executives insist they will stick with plans to keep capital spending — and drilling — in check, instead spending their windfall on dividends, debt repayment and share buybacks.

“What’s different today than the past . . . is that we are allocating capital in a way that maximizes returns to shareholders, rather than maximizing [production] growth,” said Nick Dell’Osso, chief executive of Chesapeake Energy, which filed for Chapter 11 protection in mid-2020 under the weight of debts amassed during years of rampant drilling.

Chesapeake, once a poster child for the sector’s excesses, emerged from bankruptcy in February 2021 — and earlier this month reported record-high adjusted quarterly free cash flow of US$532 million from the first three months of 2022.

It now plans to pay US$7 billion in dividends over the next five years, equivalent to more than half of its market capitalization on Friday.

“The industry was built on [oil and gas production] growth expectations, and company stocks were valued on growth expectations. That all had to get broken down,” Dell’Osso told the Financial Times.

The “reset” had been painful, but management teams would stick with the new model, Dell’Osso said.

Cost inflation stemming from supply chain and labour constraints are also deterring companies from more drilling.