U.S. Shale Drillers Cautious Despite Record Earnings

Back in mid-February, Pioneer Natural Resources’ Scott Sheffield told Bloomberg that “Whether it’s $150 oil, $200 oil, or $100 oil, we’re not going to change our growth plans.” Despite all that has happened since then, centered on Russia’s invasion of Ukraine, the attitude expressed by Sheffield in February has not changed, even though shale drillers are now almost literally raking in the cash after years of sinking in debt.

This year, U.S. shale oil companies will generate as much as $180 billion in free cash flow, according to Rystad Energy, the Financial Times wrote. According to S&P Global Community Insights, this year’s total cash for shale drillers would top all they had earned over the past 20 years.

This is impressive data for an industry that for a long time was seen as a cash-burner with no hope in sight. The last couple of months, however, proved that there is hope in sight, and it is quite a solid hope. Yet it doesn’t seem that these companies are planning to drop their cautious attitude and start drilling with no limits again.

In fact, according to the Financial Times, industry executives intend to stick with their current approach of capital discipline and spend the extra cash on dividend payouts, debt reduction, and stock repurchases.

“What’s different today than the past . . . is that we are allocating capital in a way that maximises,” the FT quoted the chief executive of Chesapeake Energy as saying in its report. Chesapeake had to file for Chapter 11 bankruptcy protection two years ago but is now back in the game and planning to pay $7 billion in dividends over the next five years.

Related: Russia Will Force Oil Buyers To Pay More If EU Introduces Tariffs

Stock prices are also improving along with the oil prices that made all this free cash flow possible, meaning some investors may be warming to the oil industry again. That would likely just add to the industry’s motivation in sticking with keeping shareholders happy rather than returning to growth-above-all.

But there may be another reason, too. Congress is “going after” the oil industry after repeated allegations of price-gouging and profiteering from higher oil and fuel prices while ordinary American drivers suffer the increasing load of excessive prices.

In late April, Democrat legislators accused the oil industry of getting rich at the expense of American drivers. They promised legislation that would make it possible for the Federal Trade Commission and state attorneys to prosecute oil companies on allegations of profiteering and price-gouging.

“Big Oil has profiteered and exploited the marketplace,” House Speaker Nancy Pelosi told media last month, citing the strong results reported by everyone in the industry for the first quarter. “They are hoarding the windfall while keeping prices high at the pump,” she added.

A Congress hearing earlier this year had Big Oil executives explain to legislators that they have no control over retail fuel prices—and why they don’t—but this seems to have been brushed aside by the lawmakers, some of whom are now discussing the latest proposal by Democrats, which is to make excessive retail fuel prices illegal.

For its sponsors, the bill is probably the next logical step in an increasingly desperate journey to keep gasoline and diesel affordable. For the oil industry, on the other hand, it probably looks like government overreach. When the government overreaches, especially in a way that threatens the business-as-usual state of affairs, industries tend to get defensive.

This is one way of looking at what the US. shale industry is doing right now. It is keeping its focus on shareholder return maximization and paying down debt rather than grabbing the opportunity to expand production at a time when global supply is tight enough to warrant such a move.

Five years ago, many would have probably taken that opportunity then and there. But not now, after the devastating pandemic that, in a way, was the mother of all oil market crashes.

Inflation is helping, too. Production costs in the shale patch are up by as much as 20 percent, driven by things like diesel prices, frac sand prices, and a shortage of workers and drilling equipment.

This inflationary pressure is already affecting production—something that congressional Democrats were probably unhappy to hear. The EIA reported that U.S. oil production declined for the first time in three months during the first week of April, signaling that inflation has started getting to drillers. The EIA also revised down its production outlook for next year, suggesting that the cost pain could linger.

So, from the outside, it may seem that U.S. shale has a golden opportunity to expand its international markets and make even more cash for itself and its shareholders. Yet the industry continues to be cautious, keeping the lid on its capex and cutting its debt load. Perhaps shale drillers have finally had one too many crises and are now building a new normal beyond production growth at all costs.

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