After years of massive losses, US shale eyes a $60-billion year

With oil prices rising to levels not seen in over two years, US shale, bouncing off one of its worst-ever years, could be looking at record profits in 2021.

Oil execs and producers are historically pretty good at making money. Oil is a roller coaster of an economic sector, based on a boom-and-bust model. Bankruptcy and insolvency are not uncommon occurrences out in the oil field, but even in the lean times, there are plenty of industry insiders making a buck, even as their own company goes down in flames.

This was even the case in last year’s historic oil crash, when companies across the West Texas Permian Basin went belly up on the heels of “Black April,” when oil prices actually went negative in a global first. Due to a drop in oil demand spurred by the spread of the novel coronavirus, the leaders of OPEC+ started to talk strategy. These talks turned into disagreement and then an all-out oil price war between the leading members of Russia and Saudi Arabia, flooding the market with excess crude oil supply and putting oil storage at such a premium that owning it became a liability. And that is how, on April 20, 2020, the West Texas Intermediate crude benchmark plummeted 306%, or $55.90, to a finish at a jaw-dropping $37.63 below zero per barrel. 

But even then, in the wake of the oil price apocalypse, shale execs managed to make off with millions even as their companies folded. “On July 7, the board of directors at Texas fracking sand supplier Hi-Crush granted nearly $3 million in bonuses to four top executives, including $1.35 million for CEO and founder Robert Rasmus,” Reuters reported in an expose published last August. “Five days later, the company declared bankruptcy.”

While the timing of the payout was decidedly egregious, it was far from outside the norm for the sector. According to the damning report, it was just “the latest in a series of board decisions that allowed the oilfield supplier’s top executives and founders to rake in tens of millions of dollars as shareholders saw the stock price plummet to pennies.” And now, around the globe, publicly-traded independent oil producers are set to make record profits in 2021.

This doesn't come as a total shock, considering that oil prices have seen an incredible rebound over the course of this year. Oil prices have not only recovered to pre-pandemic levels, but they’re also at their highest mark in over two years thanks to tightening supply spurred by people getting back on the road in a big way, OPEC staying the course in terms of promised production caps, and a retreating US dollar value. What’s really unbelievable about this year’s projected oil producer payouts, however, is not just that they’ll be high, but that they’ll shatter the ceiling and set an all-time record. They’ll be $37 billion higher than in 2008 when oil prices hit an all-time high around $150 a barrel of crude. 

Overall, the combined free cash flow from the oil production sector is expected to balloon to a whopping, never-before-seen $348 billion, blowing past 2008’s then-record of $311 billion. “Key to the turnaround is US shale, with the industry expected to reverse years of losses in 2021 and make ‘super profits’ of nearly $60 billion of free cash flow before hedges,” Bloomberg reported this week.

Rebounding oil prices are only part of the story. Also lining the pockets of oil producers is a new trend amongst oil executives, who are atypically bound and determined to constrain capital spending. “This is the opposite of previous cycles when crude rallies prompted companies to spend heavily on exploration and production in search of fresh supplies,” Bloomberg notes. 

All of this is to say that there are major liquid assets sloshing around in the oil sector. The amount of money flowing around the sector could also lead to a new spree of mergers and acquisitions, analysts have pointed out. Now it just remains to be seen whether execs can stay disciplined and stick to the plan instead of ramping up output in response to high oil prices, which could hit $100 in the near future.

This article was originally published on Oilprice.com