According to a new report by The Financial Times, the U.S. shale industry may never recover from the Covid-19 impact. The sector currently needs investments; however, the industry’s future will probably be smaller and concentrated in fewer hands.
Was the pandemic the cause?
Experts consulted by The Financial Times agree this bankruptcy situation in the shale industry is nothing new. Many operators were financially in crisis even before coronavirus affected oil demand this year.
Also, job cuts were frequent years before the pandemic crashed. According to the report, and in the words of Rystad Energy consultancy spokespeople, the sector barely had considerable profits between 2008 and 2018. Even for strong operators, capital costs increased.
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This situation results from a transformation in investment strategies, as capital sources now look for reliable and sustainable projects within the renewables market, they added.
In this regard, experts observed the shale industry needed a transition and an investment revolution even before Covid. What the pandemic caused was to lead the bankruptcy and employment situations to deteriorate faster this year.
Consulted people regret what is currently happening in the sector since the shale industry had spectacular growth and led pioneering technology for other energy activities.
The picture seems even harder for the future; experts expect U.S. oil output to fall in 2020 by its biggest-ever annual margin on the historical record.
A possible solution? Investments
According to IHS Markit, consulted by FT, most shale companies should prioritize repairing their relations with investors.
Some investors expect a wave of consolidation among operators if oil prices remain around $40 a barrel. This trend could potentially attract Wall-Street investors.
In that regard, experts recommend addressing more significant changes than those implemented during the shale patch’s recovery in 2016. Although the sector emerged from the price crash victorious, context factors changed.
One of these factors is digitalization, which now leads to a better financial understanding. Also, repeating old repairing practices may not be the answer.
For instance, to continue uninterrupted fracking activities rather than doing it for half-time periods might drive prices even lower.
Besides, the 2016 recovery borrowing boom led to the most significant debt levels in the sector. Currently, almost half of the industry’s operators carry debts even more prominent than their market capitalization.
Companies now focus on cheaper production. However, experts fear this trend to drive the industry beyond its current limits.
According to FT consulted people, shale prices in the Permian Basin could break into $20 or $30 a barrel; to have a revenue, operators must increase costs to at least $70 per barrel.
The future for the shale industry
One significant consequence for the shale industry is that the sector will concentrate on just a few oil producers for the next five years. Also, the Permian Basin will be the most operated region by the industry.
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Those companies are the most prominent developers and operators. Activities will concentrate on ten firms, including Chevron, ExxonMobil, ConocoPhillips, Hess, EOG Resources, and Pioneer Natural Resources.
Finally, experts think that the industry’s rapid annual growth rate may not happen ever again. Shale oil activities in the U.S. will be less and concentrated in fewer hands, and the oil market may never experience the best shale’s days.