US Shale Drillers Score a Cashflow Bonanza Thanks to OPEC+ Cut

Note to reader: Because of the Biden regime’s ostensible recalcitrance towards the oil and gas industries, the domestic drillers have serendipitously found themselves in a wonderful position. On one hand, Biden policies have the effect of restraining overall output with the  outsized free cash flow being diverted back to shareholders.  On the other hand, OPEC can now regain the role of the industry’s marginal player from the shale drillers. The domestic oil players find themselves with some of the most auspicious of circumstances ever.

OPEC’s surprise decision to slash oil production stands to enrich an unexpected cohort: US shale drillers.

The shock announcement sent US oil prices up by as much as $6 a barrel, signaling a new round of windfall profits for the shale industry that once was OPEC’s fiercest foe. At the same time, the development bodes ill for consumers already squeezed by rampant inflation and facing the threat of surging gasoline prices as the summer driving season approaches.

And with shale executives having already pledged to hold oil output mostly steady this year so they can focus on enhancing investor returns, fuel prices in the world’s biggest economy will be largely dictated by production decisions made in far-flung places like Riyadh and Luanda.

“One thing is for certain, OPEC is in control and driving price, and US shale is no longer viewed as the marginal producer,” said James Mick, a senior portfolio manager at Tortoise. “OPEC wants and needs a higher price, and they are back in the driver’s seat to obtaining their wishes.”

US drillers have been swimming in cash after the surge in oil prices over the last few years.

A further boost for shale companies will cheer investors. Shareholders in US oil companies reaped a $128 billion windfall in 2022 thanks to a combination of global supply disruptions such as Russia’s war in Ukraine and intensifying Wall Street pressure to prioritize returns over finding untapped crude reserves.

US production growth is less than half of what it was before 2020, with overall output yet to return to pre-pandemic levels. Major forecasters see growth of just 500,000 barrels a day or so this year from the Permian Basin, the country’s fastest-growing shale field, less than half of the more than 1 million barrels a day of cuts announced by OPEC+ on Sunday.

“OPEC and shale are much more on the same team now, with supply discipline on both sides,” said Joseph Sykora, a Dallas-based fund manager at Aptus Capital Advisors, which has $4.25 billion under management. “It really puts a floor under the price of oil long term.”

It’s a sharp contrast from much of the last decade, when US shale was a thorn in OPEC’s side, using cheap money to revitalize old and thought-to-be tapped-out oil fields with new fracking technologies. The US oil sector’s spectacular growth added more crude to global markets from 2012 to its 2020 peak than the entire current production of Iraq and Iran combined. That growth irked the Organization of Petroleum Exporting Countries and its allies, which saw its market dominance threatened like never before.

But surging US production growth did little for shareholders, who routinely saw executives ratchet up debt as they plowed more money into new wells. The plunge in oil demand during the pandemic sent many smaller drillers into bankruptcy, and those that survived vowed never to repeat the strategy of chasing production growth at any cost.

With the OPEC+ decision helping to provide a floor to oil prices, companies like Patterson-UTI Energy Inc. can better plan activity levels, said Andy Hendricks, CEO for one of the biggest providers of drilling rigs and frack crews.

“It gives a little more clarity than what we’ve had,” Hendricks said in a phone interview. Higher oil prices may eventually entice shale explorers to drill and frack more, but that will take some time, he said.

“There really isn’t excess” gear and crews available, he said. “We could reactivate some rigs, but you’re six to nine months out. So if somebody wants to do it by the end of the year, they need to call now.”

©2023 Bloomberg L.P.

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9 thoughts on “US Shale Drillers Score a Cashflow Bonanza Thanks to OPEC+ Cut

  1. PMI and ISM soft. ISM Prices Paid and employment components much less than expected. That’s good. New orders come is way short of expectations.

    S&P Global Composite PMI (Mar)
    Act: 52.3 Cons: 53.3 Prev: 50.1

    Services PMI (Mar)
    Act: 52.6 Cons: 53.8 Prev: 50.6


    ISM Non-Manufacturing Business Activity (Mar)
    Act: 55.4 Cons: 55.0 Prev: 56.3

    ISM Non-Manufacturing Employment (Mar)
    Act: 51.3 Cons: 53.0 Prev: 54.0

    ISM Non-Manufacturing New Orders (Mar)
    Act: 52.2 Cons: 62.0 Prev: 62.6

    ISM Non-Manufacturing PMI (Mar)
    Act: 51.2 Cons: 54.5 Prev: 55.1

    ISM Non-Manufacturing Prices (Mar)
    Act: 59.5 Cons: 65.0 Prev: 65.6

  2. ADP data look poor. Employment data following?

    If the US dollar is to fade into Oblivion, it would be in our best interest to own the income generating assets. If foreigners begin to dump the dollars as many fear, they have to go somewhere. Many of those dollars will flow back to the domestic economy. Own the assets.

    1. I’ve been trying to get a single family home for a rental but it has been difficult and certainly seems more competative out there then alot of the media wants people to believe. What are you opinions on attached homes / condos / townhomes etc – I know these appreciate or depreciate differently then regular single family homes so what would be your next best thing outside of single family houses for investment?

      1. Just about every piece of real estate is a potential good deal. What matters is the price one pays. There’s an old saying in real estate; we make money when we buy, not when we sell.

        Condos aren’t necessarily a bad thing, but make certain that you do not pay up for them because in a bust they’re the ones that get hit the hardest. Single-family detached are the best followed by townhomes that are owned fee simple.

        I always run the math before I buy a property. If one does it 1031 exchange, the numbers mean a little less but the results should be similar. Just make certain you’re not paying up versus historical averages. Definitely try to figure out what the rent would be and figure out cap rates and internal rates of return. When pricing I use market rent. See if you can figure out what the rents would have been five or 10 years ago versus the past purchase price and determine if you’re paying up.

        In some instances the purchase price versus rent is actually not all that terrible. Rents have really risen. Just make sure that you continually raise rents. A lot of small landlords are afraid to raise the rent and then get stuck a few years down the road with a depleted cash flow. I now raise my rents annually.

  3. Is the Collapse of the Petrodollar Imminent? Here’s How It Could Impact the World’s Reserve Currency
    It’s been rightly said that “he who holds the gold makes the rules.”

    On Sunday night, August 15, 1971, President Nixon interrupted the scheduled TV programs and made a surprise announcement to the nation—and the world. He announced the unilateral end of the Bretton Woods system and severed the dollar’s last tie to gold.

    The end of the dollar’s gold backing had profound geopolitical consequences.

    Most critically, it eliminated the main reason foreign countries stored large amounts of US dollars and used the US dollar for international trade. As a result, oil-producing countries began to demand payment in gold instead of rapidly depreciating dollars.

    It was clear the US would have to create a new monetary system to stabilize the dollar. So it concocted a new scheme… and chose Saudi Arabia as its accomplice. This agreement came to be known as the “petrodollar system.”

    The US handpicked Saudi Arabia because of its vast petroleum reserves and dominant position in the global oil market.

    In essence, the petrodollar system was an agreement that the US would guarantee the House of Saud’s survival. In exchange, Saudi Arabia would do three things.

    First, it would use its dominant position in OPEC to ensure that all oil transactions would only happen in US dollars.

    Second, it would recycle hundreds of billions of US dollars from annual oil revenue into US Treasuries. This lets the US issue more debt and finance previously unimaginable budget deficits.

    Third, it would guarantee the price of oil within limits acceptable to the US and prevent another oil embargo.

    The petrodollar system gave foreign countries another compelling reason to hold and use the dollar. And it preserved the dollar’s unique status as the world’s top reserve currency.

    Ultimately, the petrodollar boosts the US dollar’s purchasing power by enticing foreigners to soak up dollars.

    The petrodollar system has helped create a deeper, more liquid market for the dollar and US Treasuries. It has also helped the US keep interest rates lower than they would otherwise be, allowing the US government to finance enormous deficits it otherwise would be unable to.

    Multi-trillion deficits would otherwise be impossible without destroying the currency through money printing.

    It’s hard to overstate how much the petrodollar system benefits the US. It’s the bedrock of the US financial system and has underpinned the dollar’s role as the world’s reserve currency since the 1970s.

    That’s why the US government protects it so fiercely. It needs the system to survive.

    World leaders who have challenged the petrodollar have ended up dead.

    However, it’s a whole other dynamic when China (and Russia) undermine the petrodollar system… which is happening in a big way right now.

    China and Russia are the only countries with sophisticated enough nuclear arsenals to go toe-to-toe with the US up to the top of the military escalation ladder.

    In other words, the US military can’t attack Russia and China with impunity because they can match each move up to all-out nuclear war—the very top of the military escalation ladder.

    For this reason, the US is deterred from entering a direct military conflict with China and Russia—even though they are about to strike a fatal blow to the petrodollar system.

    It’s important to remember some simple facts.

    #1: Russia is the world’s largest energy producer.

    #2: China is the world’s largest energy importer.

    #3: Russia is China’s largest oil supplier.

    And now that the US has banned Russia from the dollar system, there is an urgent need for a credible system capable of handling hundreds of billions worth of oil sales outside the US dollar and financial system.

    China would rather not depend on an adversary like this. It’s one of the main reasons it created an alternative to the petrodollar system. The INE allows oil producers to sell their products for yuan (and gold indirectly) while bypassing the US dollar, sanctions, and financial system.

    Other countries on Washington’s sanctions list are enthusiastically signing up.

    According to Credit Suisse, Russia, Iran, and Venezuela own 40% of the proven oil reserves of OPEC+ members. These countries are under strict US sanctions, which makes accepting US dollars and transacting globally challenging. So it’s no surprise that these sanctioned oil producers are happy to accept yuan as payment and support the petroyuan system.

    But it’s not just sanctioned oil producers that benefit from the petroyuan…

    Think about it. Any oil-producing country has two choices:
    Option #1 – The Petrodollar

    The dismal financial situation of the US guarantees the dollar will lose significant purchasing power.

    1. The US is by far the largest oil as well as largest gas producer. Nobody comes close. Russia and Saudi Arabia are a distant second and third. A simple Google search of the data will refute your claims. The latest OPEC “cut” will only widen the gap further.

      What do you replace the dollar with? This blog has repeatedly laid out the circumstances that support the USD.

      Chicomm centrally manages the Yuan with two versions, domestic and foreign. The Chicomms are loath to supply the world with yuan via trade deficits. Lending yuan out to the world as an IMF replacement won’t cut it and will only turn its nation-state debtors into yuan debt slaves since yuan are hard to come by outside of China. Chicomm is looking for a way to supply yuan without running balance of payment deficits. It’s looking for a way without foreigners owning its debt. It’s looking for a way without running massive budget deficits.

      Obviously, Chicomm is trying to repeal the economic laws of gravity that were well studied as far back as the mid 60s with the Triffin paradox.

      It’s not working. The yuan as a reserve cannot claim more than a few percent. Every dollar ever printed is still legal tender. That’s why it’s spread all over the world and has the seal of approval with the Great Seal.

      There’s no financial system earthquake.
      Everything has been orderly and the transformation has been consistent right in front of us as we tap on our keyboards. I won’t address much of the other stuff you mention as I addressed them previously for years and why they are red herrings..

      Anyone who has been reading the blog for the past few years already knows this. This is why we are instructed to hold income generating assets. There’s no need to scare the people. We have been doing well as every crisis boosts our net worth.

      All the national governments approve of dollar “printing” as they all do it, too, to spend on largesse and to prepare for WWIII. Then they hypocritically point to the USA, and the West haters like you latch on to it.

      Chicomm China, Turkey, and Russia M2 growth are much higher than the USFed. Google it. All three nations are much more corrupt than even the evil and bad USSA.

      Russia and China both know that post-force majeure their access to USDs will be curtailed or eliminated. Thus, these group of nations (e.g. BRICS) will have to have an alternative. That’s why both are printing like mad. They will pose as the existential enemy to the West. The West will have the dollar. The East Asia bloc will have theirs, and the wealthy will be laughing all the way to the bank with the income generating assets.

      There will be a force majeure, it’s just not going to take place the way you think.

  4. This is another sign that money is flowing from bottom 90% to the top 1%. Be an income producing asset owner of stocks, real estate, and oil wells. When the tribulations come it is better to have what you need than not have it and need it.

    The Democrats are truly the party of the rich for the rich while giving lip service to the wage earner.

    1. Given what we are seeing in the commodity markets this week, I have a suspicion that the Fed will not be cutting rates like the consensus are guessing. I doubt inflation growth will be falling much further this year.

      It seems the global economy is being set up for a sustained period of higher than expected inflation rates.

      The economy is really softening, but with the underreported CPI and GDP deflator, real economic growth is very much overstated.

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