Hurdle rate scrutiny could put 20 per cent of tight oil supply growth at risk

Investment in tight oil is already growing again, with planned budget increases for 2017 averaging around 30%. We forecast that by the end of the year, total tight oil production will grow by 300,000 b/d from the Q1 lows. But before every operator recommits to aggressive growth plans, we see potential risks associated with 200,000 b/d of newly-drilled tight oil supply for 2017. This is roughly 20% of the 900,000 b/d of new-drill supply oil volumes in our base case, bottom-up model for 120 Lower 48 companies. The risk reflects our view that hurdle rates to sanction new tight oil spending are higher now because of more aggressive investment screening, and for some firms, tougher access to capital, and a higher cost of equity. For the best operators, cash-flow constraints will force them to use higher hurdle rates to pare down their massive inventory of low-cost locations. This is the first of a new series of Thought Leadership insights on the energy industry.