OPEC+ protectionism is helping the US shale industry find 32% more CFO to boost spending in 2021

Source: press release, 7 January 2021

Tight oil investments and cash from operations, with 2021 outlook scenarios (source: Rystad Energy UCube)
Tight oil investments and cash from operations, with 2021 outlook scenarios (source: Rystad Energy UCube)

The decision by OPEC+ to continue shielding the global oil market by curtailing its output, even with generous self-imposed cuts like Saudi Arabia’s 1 million barrels per day “gift”, has helped WTI crude prices exceed the $50 mark. The positive effect on oil prices is set to create a chain reaction in the US, where shale operators will see cash from operations (CFO) boosted by 32% in 2021, allowing them to increase their activity spending this year.

The price recovery has helped oil producers’ cash flow improve significantly since the second quarter of last year. In the US in particular, the rebound in prices – even before WTI hit $50 per barrel – helped shale producers generate record high free cash flow in the third quarter of 2020.

Cash from operations is a key driver for US tight oil activity. The figure correlates with the cash available for the E&P companies to invest in new wells, and represents the revenue minus all operational costs, royalty payments and gross and net taxes.

At a WTI oil price of $40 per barrel for 2021, CFO would be expected to remain flat this year. However, at the current oil price of $50 per barrel, it is expected to grow by around 32%. This means that if companies continue to operate within their cash flows, the current oil price of $50 per barrel will provide enough cash flow for a ramp-up in investments and a surge in US tight oil activity this year.

“This increased activity has already started to manifest itself, with rig activity for tight oil up 60% since the low point in August last year. Completion activity is also recovering, measured by the number of wells started to be completed by month,” says Espen Erlingsen, head of upstream research at Rystad Energy.

The low point last year in terms of completion was the month of May with 330 wells, down 75% from January. The recovery in activity became apparent in the later months of last year, and by December completion activity had doubled since May to more than 700 wells.

“The production cuts from OPEC+ have definitely fulfilled their purpose by balancing the market and supporting higher oil prices. At the same time, higher oil prices have reactivated the US tight oil industry. With the current budgeting season and improved cash flows, Rystad Energy expects to see a further increase in US tight oil activity,” Erlingsen concludes.

The CFO of shale operators in the US Permian Midland, Permian Delaware, Eagle Ford, Bakken and DJ basins in 2019 reached USD 87 billion, but the downturn brought by the COVID-19 pandemic caused the figure to plunge to what Rystad Energy estimates was USD 55.7 billion in 2020. If the positive trend persists and WTI averages at $50 in 2021, this year’s CFO is expected to rise to USD 73.6 billion.

Learn more in Rystad Energy’s UCube.