Shale drillers warn of higher costs as they report record profits

Oil prices hovering around $110 a barrel in the second quarter lifted the earnings of some of the largest shale companies. Pioneer Natural Resources Co., Continental Resources Inc., Diamondback Energy Inc., Coterra Energy Inc. and Matador Resources Co. all reported historically high profits in recent days, according to FactSet.

A measure of Pioneer’s net income reached about $2.37 billion, more than six times what it reported the same time last year. A measure of Diamondback Energy’s profit was $1.46 billion, up from $328 million last year.

At the same time, many shale companies are increasing their budgets to deal with labor shortages and the soaring prices of raw materials and services. Pioneer expects its annual budget to grow by about 7% to around $3.7 billion, while Devon Energy Corp. sees its budget rising by about 6%.

The extra spending won’t boost oil and gas production. Instead, the increase is necessary to meet their production targets for the year, most of the companies said. The production of shale wells declines rapidly, forcing companies to drill new wells to sustain output. Rising costs to drill are making it harder to stave off the declines.

Company executives said price increases are affecting everything from drilling rigs to the diesel that powers fracking units to the steel that roughnecks insert into wells. More than 10 of the largest frackers have raised their budgets for the year, according to the investment firm Pickering Energy Partners, with expected increases ranging from 2% to 18%.

“It is hard to point to any significant item that has not seen some level of price increase," Coterra Energy Chief Executive Thomas Jorden told investors this past week.

Operators have had to contend this year with a 20% to 30% cost increase because of inflation compared with 2021, according to the energy consulting firm Rystad Energy.

Inflation has been more than offset by momentous profits on the back of high oil prices. “The movement in the oil price from a returns standpoint is outstripping any inflationary effects," said Gregory Hill, chief operating officer at Hess Corp.

But the cost increases might dent future oil output. Shale companies were already looking to rein in spending following years of poor returns by redirecting cash to shareholders and away from the field. Hess said it would return up to 75% of its free cash flow this year to shareholders through dividends and buybacks. Pioneer said 95% of its free cash flow went to shareholders in the second quarter. That shift was expected to limit production growth despite climbing oil demand worldwide and the recent price increases.

“Tightness in the oil patch is leading to higher inflation [and] is making it harder to put production online in a timely manner," said Kevin MacCurdy, a managing director at Pickering Energy Partners.

Some producers, including ConocoPhillips, Pioneer and Diamondback, allowed their oil production in the continental U.S. to drop between about 1% and 2% from the prior quarter. Pioneer cited a divestiture as a reason for the decrease.

The Energy Information Administration expects U.S. oil production to grow by about 1 million barrels a day this year, but output so far has been mostly flat. Domestic production dropped by about 30,000 barrels of oil a day to under 11.6 million between April and May, according to the EIA. Bad weather in North Dakota this spring disrupted operations there, companies have said.

The Biden administration has repeatedly called on shale drillers to increase production and help put an end to a prolonged period of elevated gasoline prices that has underpinned inflation. Amos Hochstein, an administration energy-security adviser, said this past week on CNBC that companies “need to put together the frack crews…and invest so they can have additional oil output."

Company executives said fracking crews have been in high demand, especially in the oil-rich Permian Basin, in West Texas and New Mexico. Occidental Petroleum Corp. told investors it was reallocating about $100 million to the region to match upward of 10% in cost increases there. A tight market for services is also weighing on producers in the natural-gas fields of Appalachia, companies said.

Service companies, which provide producers with workers and equipment, mothballed machinery and laid off thousands of workers during the pandemic. They have since invested little in new fleets of equipment, giving some service companies leverage to set higher prices, analysts and executives said.

Shale companies have sought to cushion the impact of inflation on their budgets by cutting costs where they can. Diamondback Energy said its engineers were drilling slightly smaller well holes to bring costs down and turning to electric fracking fleets powered by natural gas, which is cheaper than diesel.

Still, companies have warned that they expect budgets to increase further next year. The natural-gas producer Range Resources Corp. told investors recently that it expected its 2023 budget to be 10% to 15% higher compared with this year.

“Inflation is still with us, it’s staying with us," said ConocoPhillips Chief Executive Ryan Lance.

This story has been published from a wire agency feed without modifications to the text