U.S. shale’s influence to grow in 2018

The oil & gas industry closed out 2017 on a strong note with increased confidence as crude oil prices rose late in the year, leading to higher rig counts and increased interest in shale plays beyond the popular Permian Basin.

Some shale oil producers — which ramped up capital expenditures in the spring of 2017, only to put the brakes on in the summer when the price of West Texas Intermediate (WTI) dipped — returned to action by year-end as prices stabilized.

As a result, we are entering 2018 on a positive roll for U.S. shale production. We forecast a modest rise in rig counts this year, on the belief that WTI prices will remain stable in the high $50s to mid-$60s a barrel this year, thanks in part to OPEC’s plan to keep supply restraints in place.

Our confidence is buoyed by late 2017 announcements of increased commitments to U.S. shale exploration and production by Big Oil, as well as increased hedging in the fourth quarter.

In December, Chevron announced it would invest $4.3 billion in U.S. shale production in 2018, most of that in the Permian Basin, but about $1 billion in other plays. Its 2018 shale investment is about 70% higher than its 2017 U.S. shale budget.

The IEA predicts U.S. shale oil output, now about 6.17 million barrels per day (bpd), will see an increase to 8 million bpd by 2025, driven largely by private equity firms willing to pump cash into the sector.

Beyond the Permian Basin

U.S. shale should also benefit from the recent announcements that E&P companies are expanding beyond the Permian Basin. World Oil notes that more than $2 billion in drilling deals have been announced in the last four months in the Denver-Julesburg (DJ) basin northeast of Denver.

The Eagle Ford is also attracting activity. Baytex Energy Corp., a Canadian driller, plans to bring 30 net wells into production in the Eagle Ford in 2018 — spending more than half its drilling budget in the South Texas field.

Interest is on the rise in fields such as the DJ and Eagle Ford, in part because land acquisition prices are far cheaper than they are in the Permian Basin, and stable oil prices have encouraged companies to once again look for opportunistic plays.

Renewed confidence and its impact on M&A

The Dallas Federal Reserve, in its latest Dallas Fed Energy Survey taken in mid- December, noted that executives in the oil & gas industry from the Fed’s 11th District, which covers companies operating in Texas, southern New Mexico and northern Louisiana, were feeling more confident and expected a modest rise in rig count this year.

“Growth in activity rebounded a bit relative to last quarter (Q3), outlooks improved greatly and there was a modest decline in uncertainty about the future,” Dallas Fed Senior Economist Michael D. Plante said, commenting on the survey.

Oil & gas support service companies are benefiting from the renewed confidence of E&Ps with an increased volume of activity in the nation’s shale plays.

They’ve been impacted, however, by labor shortages but have been successful in passing on cost-of-business increases to their clients. As a result, we expect oilfield service companies to experience higher margins in 2018 than 2017.

This should provide some healthy leverage with customers interested in merger and acquisition opportunities. Overall, we expect M&A activity in the oilfield services sector to ramp up modestly in comparison to 2017, as confidence returns to the oil patch.

Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across many sectors, including energy infrastructure.