U.S. Producers Face Tumultuous Year

After years of relying on cheap financing and investors’ appetite for energy, U.S. oil producers are now focusing on profitability, and the numbers don’t look right. They are scrambling to instil financial discipline and reassure anxious investors amid signs of softening global demand.

Chevron, one of the largest U.S. producers, reported a $6.6 billion loss for the fourth quarter of 2019, much of it from a $10.4 billion writeoff primarily related to shale-gas production in Appalachia. Its profit for the year slid 80percent.

For Exxon Mobil, the largest U.S. oil company, things didn’t look much better. It reported fourth-quarter earnings per share fell 70percent, and its net income of $5.69 billion was the weakest in three years. Its shares have tumbled 30percent since late April 2019, as oil companies as a group turned in the worst performance in U.S. equity markets.

Now, the industry is facing global pressures as well. As the coronavirus scare spreads and China’s economy essentially shuts down in response, global oil demand appears headed for its first quarterly decline in more than a decade, according to the International Energy Agency. The IEA cut its growth forecast for the year by 30percent, to 825,000 barrels a day, a nine-year low.

Ironically, the only bright spot in the wave of industry financial reports has been the service companies such as Schlumberger and Halliburton, who have been the biggest performance laggards in the Oil Patch during the past year. Both beat analysts’ estimates and indicated they see improvement in the second half of the year — but only because of gains in their international and offshore operations rather than a resurgence in U.S. shale plays.

While many companies are struggling to make money, U.S. oil production continues to rise. A February report by Rystad Energy found that production from Texas, the biggest oil-producing state, is expected to increase steadily each month this year. The state’s production was 5.4 million barrels a day at the end of last year.

This reflects a broader national trend that will see U.S. production surging through the end of next year, according to the U.S. Energy Information Administration.

At the same time, companies’ capital budgets are tightening, and rig counts are at a three-year low after falling 25percent last year.

This has been the ongoing conundrum for shale producers — balancing high production volumes against weak operating cash flows. Investors have grown weary of the growth-at-any-cost model pursued by many shale companies. Producers have focused on improving efficiencies, reducing costs and boosting profitability, but so far, the efforts to improve financial discipline have not appeased investors.

Last year, oil company bankruptcies rose 50percent from 2018, according to a report released in January by the Dallas law firm Haynes and Boone. Forty-two producers in the U.S. and Canada filed for bankruptcy compared with 28 a year earlier. In the past five years, more than 200 oil companies have gone bankrupt. Falling rig counts also mean lower employment levels. After creating about 100,000 jobs in 2017 and 2018, industry employment began declining last year, and most labour analysts expect the trend to continue through the end of 2020.

Todd Staples, president of the Texas Oil and Gas Association, says that as long as oil prices remain at or below $50 a barrel, the industry is likely to continue struggling.

"With production strained by prices, we may have additional bankruptcies and mergers and acquisitions as companies work to maintain a competitive," Staples told reporters during a conference call in February. "Job growth may continue to lag further than we’ve enjoyed in recent years."

Weaker prices for oil and natural gas are also affecting another area of the U.S. energy landscape: renewables. While 2020 is expected to be a record year for solar and wind power developments across the country, the ready availability of cheap natural gas may slow the advance.

Natural gas has long been seen as a complement to renewables, because gas-fired power plants could turn on and off quickly, offsetting the intermittency of renewables. The abundant supply of gas, unleashed by the development of hydraulic fracturing, has helped bolster the spread of renewables in the U.S.

In addition, low gas prices have prompted a move to shift more electricity generation away from dirtier sources such as coal.

However, some industry observers say that because gas prices have remained so low, the fossil fuel is now directly competing with renewables, rather than supporting them.

“The fact that there’s an abundance of it makes the move to complete decarbonisation much harder,” Ravina Advani, head of energy, natural resources and renewables at BNP Paribas SA, recently told Bloomberg News. Gas is a tough competitor. “It’s reliable, and it’s cheap.”

Investments in U.S. renewables rose by 28percent last year, to a record $55.8 billion, according to Bloomberg New Energy Finance. That’s expected to continue, with renewables becoming the fastest-growing source of electricity during the next three decades. By 2050, renewables will account for 38percent of the country’s power generation, the EIA predicts.

And at least some of that growth is going to require cheap supplies of natural gas to balance grid reliability on cloudy or calm days when solar and wind power are ineffective.

The rise of renewables, of course, has long-term implications for fossil fuels, but in the short term, the U.S. oil industry’s biggest challenge is still its own success.

In the past decade, the surge of U.S. production from hydraulic fracturing upended the global oil markets and turned America into the world’s biggest energy producer. This year, however, is shaping up to be a difficult one as the industry struggles to regain its footing amid growing supply, weaker demand and lower prices.