Is shale still a good investment?
IF HE WERE ABLE to reverse the decision
to invest $20 billion in US shale back in 2011
with the company’s purchase of Houston-
based Petrohawk, retiring BHP Billiton
Chairman Jacques Nasser says he would do
it in a heartbeat. BHP is primarily a mining
company, so this was an unusual investment
for the Australian firm that was made near
the peak of the petroleum industry’s boom
cycle when values were high. Back in May, the company’s
CEO, Andrew Mackenzie, similarly said the deal was “poorly
When it comes to mergers and acquisitions, what is bad
for one company is often good for the other. Floyd Wilson
probably has no doubt he made the right decision at the right
time to sell Petrohawk.
BHP Billiton is not the only company to have regrets about
its investment in shale. Activist investors have also questioned
the decisions made by management
teams for several large North American shale operations. Some are urging divestment, while others are
demanding that top executives step
down or accept more independent
board members to look after investor
The question I would pose is: Is
shale still a good investment? There are arguments pro and
Writing in this issue of OGFJ, Rystad Energy’s Nadia Martin
Wiggen notes that while activity levels by North American
shale producers have risen since the first of the year, share
prices for oil companies have retreated from first-quarter
highs. And in the oilfield services sector, she says, “Share prices
have collapsed faster than the index of E&P companies like
we saw in 2008.”
On the positive side, Wiggen says she observed “significant
decreases in breakeven oil prices both in shale and offshore,”
doubtless due to improvements in efficiency and reduced
payments to OFS companies between 2Q2014 and 3Q2016.
Rig rates also fell substantially during this period.
Fortunately for US and Canadian producers, oil prices began
to climb back up after OPEC enacted producers cuts from its
member oil exporters and several additional large producers
as well. On July 31, WTI broke the $50 threshold for the first
time in a long while. This has propelled a modest recovery in
the oil market, which in turn is attracting new investors.
Earlier this year, Harold Hamm, CEO of Continental Re-
sources, told Reuters that US shale producers are drilling
themselves into a hole and risk flooding the market with
excess crude oil. As drilling and production are rising, the
companies are “barely breaking even or losing money” and
share prices are declining, according to the article. Hamm
urged producers to be prudent and use some discipline.
Many industry participants believe that $50 is about the
break-even point for company profitability. When the oil price
falls below $40, it may be time to rethink strategies and lay
down some rigs. Although some producers might be profitable
at the wellhead with $40 oil, that doesn’t translate into bottom-
line net income, which is what investors and shareholders
want to see.
Eugen Weinberg, a senior commodity analyst at Commerz-
bank AG in Frankfurt, Germany, has written that the OPEC
production cuts would prompt US shale producers to drill
more and increase US production figures, which would keep
crude prices down. His advice to OPEC is to change course
and go back to the oil cartel’s initial strategy of pumping at
the maximum rate and “let prices crash to kill shale” while
aiming for steady price increases over the long term.
Gee, and I thought Germany was
a US ally.
Nevertheless, there is a point to
be made here. If OPEC cuts produc-
tion in hopes of raising oil prices, it
serves no purpose if US shale produc-
ers respond by raising production
levels to offset those cuts. It simply
changes the origin of the crude oil.
Lacking any increase in demand, the lower prices won’t change
There are a number of wild cards in the deck that could
impact future oil prices, notably Libya, Nigeria, and Venezuela.
A July 24 Raymond James research report notes that Libya
and Nigeria have both boosted production this summer after
four years of recurring violence in those countries that has
hampered oil production. However, this increase may be
temporary as investors have been reluctant to sink funds into
countries that are seen as unstable. RJ’s take from this is that
current production levels are “flattish at best.”
As for Venezuela, the South American nation seems on the
verge of an all-out civil war. The US just announced economic
sanctions, which may hurt the country’s people more than
the government, but that’s another story. So far, the US has
not banned the import of Venezuelan crude, much of which
is refined on the Texas Gulf Coast.
RJ thinks these three OPEC “wild cards” will add 550,000
bpd of net supply growth this year, which may be sustainable
into the future.
Do we have an answer to our question as to whether or
not shale is a good investment? No. These are just some points
to consider. Investors will have to answer that question for
Nevertheless, there is a point to be made
here. If OPEC cuts production in hopes
of raising oil prices, it serves no purpose
if US shale producers respond by raising
production levels to offset those cuts.