U.S. Shale Breakeven Price Pegged at $50
U.S. shale producers need a WTI oil price around $50 per barrel to break even, according to an analysis of financial statements for the second quarter.
Fifteen of the largest shale oil and gas producers reported total net losses of $470 million for the three months between April and June when benchmark WTI prices averaged $48.
Total losses were down from $3.7 billion in the first three months of the year and $7.4 billion in the same period in 2016, according to earnings statements published in the last week (http://tmsnrt.rs/2ftmgnd).
Nine of the companies in the sample reported positive net income in the second quarter, down from 10 in the first quarter, but well up from none in the same period last year.
Shale companies have staunched the losses thanks to a combination of cost cutting, improved efficiency and the rise in oil prices.
But there is considerable controversy about how high prices need to be for shale producers to cover all their costs and earn a return for their investors.
Some firms claim they can break even and even make large profits with benchmark WTI prices below $50 or even $40 per barrel.
It remains unclear if these figures apply to full lifecycle costs (including overheads) and all the parts of all the shale plays (or just the most productive sweet spots).
However, Harold Hamm, chief executive of Continental Resources (CLR), a large shale producer in North Dakota and Oklahoma, has said prices need to be above $50 to be sustainable.
Prices below $40 would cause drillers to idle rigs again, Hamm said in a television interview earlier this summer ("Harold Hamm warns oil prices below $40 will idle U.S. drilling", CNBC, June 28).
Following a cyclical downturn between the middle of 2014 and the middle of 2016, the oil market has discovered the breakeven price for the U.S. shale sector.
Some shale producers have lower breakeven prices than the average, and some higher, but the sector as a whole seems to need around $50 to grow production profitably.
BREAKEVEN PRICE
Empirical evidence suggests Hamm's figures are roughly correct, with shale producers making small losses just under $50 per barrel.
The number of active drilling rigs has levelled off in recent weeks after benchmark WTI prices declined from $54 in late February to just $43 in late June (http://tmsnrt.rs/2hJXkZG).
Changes in the rig count tend to follow changes in benchmark WTI prices with a lag of around 16-20 weeks (http://tmsnrt.rs/2hISwnk).
In recent weeks, many shale producers have also announced small reductions in capital spending for the second half of 2017 as they tighten budgets in response to the fall in oil prices.
Taken as a whole, the indications are that the sector's average breakeven price is close to $50, plus or minus a few dollars per barrel, which should also act as a floor for oil prices going forward.
Some shale producers managed to hedge their production for this year late in 2016 or early in 2017 when benchmark oil prices were slightly higher than $50.
In most cases the realised post-hedging price is a few dollars below $50 as a result of hedging and transportation costs.
Pioneer Resources, one of the most active hedgers, realised a price of $45 per barrel during the second quarter of 2017, or $46.59 including other derivative items, compared with a benchmark WTI price of $48.28.
But most shale producers have so far hedged only a relatively small proportion of their anticipated production for 2018.
Pioneer has hedged around 90 percent of its output for the rest of the year, but only 50 percent for 2018, according to its most-recent investor presentation.
Shale producers still have some time to decide whether to hedge more production for 2018, and at what price level, which leaves them with some valuable optionality.
WTI futures prices for calendar 2018 are trading around $50, up from $45 in June, posing a question for shale firms about whether to hedge now or wait and hope for still higher prices (http://tmsnrt.rs/2hJqhVw).
For the last week, WTI prices have traded in a relatively narrow range around $50, supported from below by the breakeven needs of the shale firms, but capped from above by the threat of renewed producer forward sales.
By John Kemp
