Tight oil in turmoil

By Ben Shattuck, Research Director, Americas Upstream Oil & Gas, and Rob Clarke, VP of Research, Lower 48 Upstream

It’s been over a week since the OPEC+ deal fell apart and the oil price plummeted. The two most important questions are: How will the sector respond? And what impact does that have on supply?

Nimble as ever, more than 10 tight oil producers have revised 2020 guidance downward ranging between 20-35%.

Ultimately, deeper cuts are likely to follow; even from those who have already revised. And in terms of production? The technology we use to model demand, supply and its impact on the market is working overtime, but the early takeaway is this: the short-term momentum of tight oil is great enough to carry growth well into the second half of 2020, at which point the scale of cutbacks will determine the trajectory.

Our goal is to keep our customers up to speed in this fast-moving environment. Last week, we shared with our customers 10 takeaways from one of the most volatile weeks in the history of the shale sector. Here are three:

1. The most imminent risk to tight oil producers may be RBL redeterminations next month. Banks will want to flex as much as they can, but debt covenants will be violated. On top of this, companies are not well hedged for 2021. This makes the duration of the price shock absolutely critical.
2. Rigs aren’t under long-term contracts and they’ll fall fast. The ones that do remain will be put on high graded projects. Producers will drill extended-reach laterals and up-space as much as possible. Less than 10% of our inventory generates a 15% IRR at US$35/bbl WTI so new-drill opportunities can only be in the best rock.
3. Cost-cutting can’t save the day. Operators are already messaging they'll ask OFS for up to 25% reductions. They won’t get it. Any rate concessions are completely unsustainable. Service providers that can merge will. Others will go into bankruptcy.

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What could this mean for oil and gas companies and the global markets of which they form a critical part?

Last week, our analysts got together to share their initial findings. Listen to the webinar below: