By December 15, 2017 Read More →

US shale investment pouring in despite concerns on returns

US shale

US shale firms on prime shale fields are having little trouble attracting funding for their operations. 

US shale producers in prime fields have little trouble accessing cash

Investors and financiers are throwing money into US shale production companies which will likely mean US output will continue to rise through the middle of the coming decade, according to a report by Reuters.

The money is pouring into the shale producers, despite pressure from some investors who want to see companies prioritize profit margins over expanded production.

Buddy Clark, co-chairman of the energy practice group at Haynes Boone law firm in Houston told Reuters that producers holding land in prime shale fields are not having any trouble financing their fracking operations.

“If you’ve got the rocks, you can get the money,” he said.

According to financial data from Preqin, through the third quarter of 2017, private equity firms have sunk $20.26 billion into energy-related deals.  This is 36 per cent higher than all of 2016.

IPOs for US-listed oil and gas firms raised $2.93 billion this year, up from $1.52 billion in 2016, according to Thomson Reuters data.

As well, hedging, or contracts used by producers to lock in prices on future output, has increased this year.

According to researcher PetroNerds LLC, forty midsize producers hedged 45 per cent of their production in the third quarter of this year, up from 36.5 per cent in 2016.  These companies upped their capital spending by nearly two-thirds in 2017.

Producers are showing investors that they can improve their efficiencies using newer well designs to boost profits.  Companies are also shifting from less productive shale acreages.

Higher production and cash flow means companies like ConocoPhillips will boost their capital budgets in the coming years.  Between 2018 to 2020, ConocoPhillips says it will spend an average of $5.5 billion, up from about $4.5 billion in 2017.

“This is not a supply source that is going away any time soon,” said Ryan Lance, Conoco’s chief executive, told Reuters.

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Following the fall of oil prices in 2014, banks retreated from lending money to oil companies.  Taking their place, private equity funds, hedge funds and other stepped in.

Mark Stoner, partner at Bayou City Energy, says after the banks left, his company found “a finance vacuum that we’re looking to fill”. Bayou City financed about 80 new shale wells since 2016.

Other innovations in financing include DrillCos, which allows investors to finance new wells and control their cash flow until double-digit rates of return are seen.  Since 2015, these types of partnerships have invested at least $2 billion in production.

Special purpose acquisition companies, or SPACs, and infrastructure partnerships that allow producers to tap pipeline and storage operations for money are also other means of financing in the industry.

SPACs sell investors on the reputation of their veteran managers and hunt for oil companies to buy.

Despite the hype, there are some who remain cautious about US shale production, including OPEC, Continental Resources Inc and Schlumberger NV.

Detractors point to rapid decline in shale-well output over time and dangers involved in ever-longer horizontal shale wells.

Reuters reports that Schlumberger’s Executive Vice President Patrick Schorn told investors earlier this month that “The ability of tight (shale) oil to influence global supply dynamics, and therefore price, will diminish over time.”



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