Oil prices are back on the rise, but shale drillers still have little incentive to ramp up activity.
The number of active oil rigs in the U.S. fell to a 17-month low of 784 last week, according to oil-field-services company Baker Hughes, the latest sign that investor pressure to cut back on spending has weighed on U.S. production growth.
U.S. oil prices have rallied nearly 30% this year, returning to $60 a barrel last week after the Organization of the Petroleum Exporting Countries and its allies agreed to continue production cuts into 2020. Light, sweet crude for August delivery fell 3.3% to $57.62 a barrel on Wednesday.
Even if prices gain further, the rig count should continue to fall, said analysts at Raymond James.
“The capital markets haven’t been available,” said Praveen Narra, an equity analyst at Raymond James. “That has led to more conservative budgeting processes and an unwillingness to revise activity upwards even when oil prices are rising.”
Raymond James expects oil and gas rigs to decline by another 40 rigs in 2019, and recently revised this year’s average rig forecast to 980 rigs from 1,015 rigs. Total rigs fell last week to 958.
In a report last week, the International Energy Agency said it expects supply to exceed demand next year as production increases in countries outside OPEC, including the U.S. But the recent plateau in production activity means that U.S. shale may grow at a slower pace than many analysts and organizations had forecast.
“That suggests that U.S. production is not going to achieve the levels projected, or may even decline a little bit by the end of 2020,“ said Philip Verleger, an energy economist. “Then the oversupplied market goes away.”
Shale companies have struggled to attract capital this year, as oil prices have whipsawed on uncertainty around geopolitical concerns and demand growth. Investors have also become skeptical after drillers spent years favoring production growth over returns.
So far this year, North American energy producers have raised less than $400 million by selling new shares, compared with $6.5 billion raised last year, according to Dealogic.
In response, producers have emphasized spending cuts and returning money to shareholders.
“That’s the formula that is going to attract investors back to the sector,” said Rob Thummel, senior portfolio manager for Tortoise Capital Advisors, which manages about $21 billion in assets. “The first stage of that is you have to lower your capital and then the rig count is going to go down.”
Investors will stay focused on modest spending and free cash flow this earnings season, Mr. Thummel said.
said it would acquire
Carrizo Oil & Gas
in an all-stock deal that the companies said will help cut costs and increase cash flow.
At a June energy conference,
Pioneer Natural Resources
executive Richard Dealy said the company has prioritized returning money to shareholders by increasing the company’s dividend and buying back shares. “We have been laser-focused on lowering our break-even costs,” the chief financial officer said.
The S&P 500 energy sector has risen about 10% this year but has lagged behind every other sector except health care in year-to-date performance. The sector has lost 16% from one year ago.
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