US Shale's Reinvention Holds Firm

• Leading US shale producers are affirming our view that ultra-strict capital discipline will hold until demand recovers and Opec-plus supply cuts are mostly unwound. • Producers are using extra cash to fix broken balance sheets and reward shareholders, paving the way for a new model E&P. • More significant growth could re-enter the mix next year, but investors want supply-demand fundamentals, not prices, to dictate activity. The Issue All eyes have been on US shale to see whether the historically profligate growth sector might disrupt Opec-plus' delicate effort to balance oil markets while the coronavirus pandemic continues to erode demand (EIF Dec.9'20). So far, as a group, E&Ps are proving to be a reliable regulator of output (EIF Mar.3'21). The past three months have been a major test given benchmark US crude's push above $60 -- a threshold that would have unleashed significant reinvestment in years past. What the Data Show Major public US E&Ps are holding the line on highly conservative capital budgets for 2021 even though West Texas Intermediate (WTI) crude prices are now around $65 per barrel -- more than 60% higher than the $40 price most budgets were set against. The result has been an eye-opening amount of free cash flow. US E&Ps Embrace Capital Discipline ($ million) Cash Flow From