U.S. shale drillers post positive cash flow for the first time on record in Q2, Rystad says

Energize Weekly, August 28, 2019

Major U.S. shale operators, thanks to strong oil prices and more efficient operations, posted a sharp turnaround in the second quarter of 2019, showing positive cash flow for the first time on record, according to Rystad Energy, an Oslo-based energy consultant.

In the second quarter, 35 percent of the 40 dedicated U.S. shale companies Rystad tracks had positive cash flow, up from 10 percent in the first quarter of 2019. Collectively the group posted $110 million net positive cash flow from operating activities (CFO).

“That is an industry first,” Alisa Lukash, a Rystad senior energy analyst, said in a statement. “The five-dollar increase in the average WTI oil price from the first to the second quarter of 2019, coupled with operators’ efforts to keep spending within their initial budgets, resulted in a slight surplus of adjusted CFO for total capex [capital expenditures].”

Many operators reached positive earnings in the second quarter. That accumulated profit, however, was depressed by the $1 billion transaction costs associated with Anadarko Petroleum’s termination fee of its planned merger with Chevron, Lukash said.

West Texas Intermediate (WTI) began 2019 selling for $46.45 a barrel and saw a sharp increase hitting a high of $66.30 a barrel in late April before falling. It sold for $55.39 a barrel on Aug. 22.

Productivity also played a role in the improved balance sheet. The 40 shale operators Rystad tracks account for nearly half of U.S. shale production, and they showed a 3 percent increase in drilling and completion capital expenditures in the second quarter and a 7 percent increase in completed wells for the three months,

CFO is the cash that is available to expand the company, reduce debt or return to shareholders. Shale drillers have been fueling a rapid expansion of drilling with loans and stock sales as CFO has been in the red.

Shale drillers have been under pressure from investors to balance their capital expenditures with operational cash flow, while keeping up production, and generating enough cash for stock repurchase programs and dividends.

Without cash flow or new debt, operators would face cutting drilling programs. Investors have become increasingly wary of the sector.

In the first half of 2019, U.S. exploration and production companies raised a record low $4.8 billion in loans and equity compared with an average for first six months, since 2014, of $16.4 billion, according to Rystad.

No pure U.S. shale operator has made a public offering since Magnolia Oil & Gas’ initial public offering in 2017.

“This leaves the industry with fewer options to boost capital guidance throughout the remainder of 2019, as operators had significantly frontloaded capital budgets this year, leaving 46 percent of guided capex for the second half of the year,” Lukash said.

Lukash said that the slowdown in spending doesn’t immediately translate to halt in production growth as there is a lag between budget capital and production.

“As strong fracking has already been confirmed for the second half of the year, we do expect robust completion activity to persist in the third quarter, before slowing down in the final quarter of 2019,” Lukash said.

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