As oil-well backlog shrinks, U.S. shale may upset investors and drill more

New York (Sept 14)   U.S. energy producers have cut so deeply into a once-large reserve of oil wells waiting to be turned on they soon may have to resume drilling to keep production from sagging, executives and analysts said.

This would mean an increase in spending which could unsettle investors who have benefited from shale companies' recent prioritization of shareholder returns over ramping up production.

Companies, including Diamondback, Pioneer Natural Resource and Devon Energy, for example, have redirected rising cash returns to dividend growth, variable distributions, buybacks, and further debt reduction.

Investors, frustrated with years of low returns from the sector, have punished companies that have looked to grow production at the expense of shareholder return and rewarded those that have shown capital discipline.

Drilling new wells could add to supply at a time when oil is selling for $70 per barrel, a profitable level for U.S. shale and OPEC producers alike.

Those high prices, hurricane shut-ins at U.S. offshore wells and a rapidly shrinking backlog of drilled-but-uncompleted shale wells may spur producers to restart drilling and test their pledge to keep spending flat.

The backlog of shale wells waiting to be turned on has fallen sharply, the latest U.S. data shows, shrinking a reserve that allowed companies to maintain output without spending more.

Some executives say more shale will be needed to offset normal production declines and hurricane losses, and investors will have to accept it. "Spending in 2022 will have to be higher just to sustain volumes enjoyed in 2021 and I think in general Wall Street is aware of that," said Nick O'Grady, chief executive at Northern Oil and Gas Inc, which owns stakes in wells in Texas and North Dakota.

FOUR YEAR LOW

New wells cost about $7 million apiece with drilling representing about 30% of the total. With oil at $70 a barrel, producers could put more money into drilling and still manage to increase shareholder payouts, analysts said.

The number of drilled but uncompleted wells, called DUCs, fell to 5,957 in July, the lowest in four years, from nearly 8,900 at its 2019 peak, based on U.S. Energy Information Administration data.

Reuters