Flush with cash, U.S. shale industry weighing how much to boost output

U.S. shale executives have finally achieved something that eluded the industry for more than a decade: the ability to turn over billions of dollars in dividends to shareholders while at the same time boosting production to tap into surging global oil demand.

The question now is just how much the shale explorers will reinvest in fresh drilling. The stakes are high for them and the entire global economy: Drill too much, and they risk triggering a damaging price war with OPEC and its allies; drill too little, and oil could soar to $100 a barrel and throttle growth across the world.

The next few weeks will be telling. Executives at industry heavyweights Pioneer Natural Resources Co. and EOG Resources Inc. will be pressed to reveal details on their investment plans when they report quarterly earnings. Investors cheered the frugality adopted by management teams after the pandemic-driven collapse in demand and prices, making oil stocks the best-performing sector of 2021.

Now, with Pioneer’s cash flow expected to be large enough to fund dividends nine times its 2020 payout and EOG seen reporting record-high annual income, both companies are prepared to increase output up to 5 percent.

It’s a titanic shift from the first decade of the shale boom. Back then, companies drilled at a frenetic pace, driving U.S. output to record highs and provoking back-to-back price wars with the Organization of the Petroleum Exporting Countries. The result: Shale companies posted a collective $200 billion in losses, which prompted Wall Street to sour on the industry. When the pandemic hit and prices collapsed further, companies had no choice but to restrain drilling, dismantle rigs and fire workers.

The U.S. oil industry now has a range of options for balancing growth with shareholder returns. For example, oil at the $79 mark allows producers to return $50 billion of cash to investors and lift output by 2 million barrels a day, according to IHS Markit. That’s equivalent to the entire annual production of Nigeria and Venezuela combined. Or they could return $75 billion and grow daily output by just 500,000 barrels.

“Shale can and will bounce back at some price,” said Raoul LeBlanc, vice president for upstream at IHS Markit. With crude fetching more than $80, the industry “can give back very large sums to shareholders and start growing again.”

As alluring as high crude prices are to public drillers, shareholders’ appetite for cash returns is paramount. Companies boosting their payouts have helped lure investors back to the sector, casting oil companies as the top performers in the S&P 500 Index this year and adding to outsized gains in 2021.

“Public companies won’t want to risk breaking away from their current mantra of limiting output,” said Elisabeth Murphy at ESAI Energy LLC. “It has paid off for them, so why change?”

Production in the world’s largest shale field, the Permian Basin of West Texas and eastern New Mexico, already is growing, having hit a record in December. Total U.S. output is expected to reach 12.4 million barrels a day in 2023 — 11 percent more than 2021 and higher than Saudi Arabia’s current production. Most of that growth is coming from closely held shale explorers who control most of the U.S. rig fleet and are seen boosting drilling budgets by more than 40 percent this year, according to Evercore ISI.

“If the U.S. is adding less than a million barrels a day, you’re probably going to be in a nice sweet spot,” said Chris Duncan, an analyst at San Diego-based Brandes Investment Partners, which manages about $25 billion. Any more than that,“and you’re going to have an issue with the world absorbing that.”

The CEOs of ConocoPhillips and Occidental Petroleum Corp. both said Monday that they expect U.S. crude output to increase by about 800,000 barrels a day this year.