October 23, 2021

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US oil production: Texas may not be big enough to ram down prices

Oil & Gas industry updates

Greg Abbott told Joe Biden, via Twitter, that the US hardly needs Saudi Arabia to boost oil output and reduce pump prices when it has Texas. Unfortunately for Abbott, drillers in the Lone Star State answer to Wall Street now, not their governor.

The US President has pleaded with Opec to pump more barrels per day. US petrol prices are surging this summer. At the same time, US oil production has not rallied as sharply. The US benchmark oil price is hovering at around $70 per barrel.

After years of chasing revenues and bleeding cash, US independent oil producers have had discipline imposed on them. Free cash flow, dividends and low-risk M&A are now fashionable. But the temptation to chase the price chart in the hope that this time things will turn out differently remains.

In 2015, America produced roughly 9m b/d of oil. That rose to almost 13m by early 2020. The investment community happily funded that expansion with tens of billions in financings. Promised profitability never really arrived. Cutting-edge hydraulic fracturing required constant investment. When the pandemic bust arrived, several companies including the famed Chesapeake Energy succumbed to bankruptcy.

Chesapeake has reorganised itself and just this week said “we will not break the balance sheet. We are not the old Chesapeake.” It is among the reformed gamblers that pays standard dividends, plus extra payouts depending on available cash flow.

One top driller, Pioneer Natural Resources, recently committed 75 per cent of free cash flow to shareholders. Oil hedges, locking in modest selling prices, constrain production spending. Oil demand is also at risk with the Delta variant surge.

In recent months, US crude production has rebounded to about 11m b/d. Regardless of what Greg Abbott thinks, a large global oil market will not immediately respond to added US supply.

Moreover, American drillers have less appetite for that fight than previously. Geopolitics and local economic interests may, for once, have aligned, even if the governor of Texas did not get the memo.

The Lex team is interested in hearing more from readers. What’s your bet on the oil price? Please tell us in the comments section below

Video: End of the road for America’s oil and gas pipelines?

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