I recently wrote about one major signal that oil is back. While the total rig count in the U.S. is still down 43% from a year ago, a recent report from Baker Hughes (BHI, Financial) showed that overall U.S. rigs climbed to 497 from the previous week's count of 489. We're also seeing some traction internationally, although Canada continues to struggle given its high-cost position in oil sands.
While it may not seem overly impressive, this uptick in rig count is the first sign of life that energy investors have received in quite some time. And while shale oil has been under immense pressure since its explosive rise that peaked in 2015, we have reason to believe that shale projects are ready to roar once more.
The oil collapse originated from a newfound supply glut provided by cheap, low-cost U.S. shale projects. After a price war broke out, most of these new suppliers continued pumping for far longer than most thought. Finally this year investors started to feel some relief, with U.S. and Canadian crude production falling enough to push oil prices back towards $50 a barrel.
As we'll see however, the next shale production wave could be just around the corner.
According to a report by the Bloomberg Intelligence unit, projects in the Permian Basin and Eagle Ford can remain profitable even when crude prices fall below $30 a barrel. A big reason for low costs comes from slow-decline horizontal drilling wells. Areas such as DeWitt County and Reeves County break even at prices below $25 a barrel.
Here's the whole list of estimated breakevens for major shale plays. Note that over 80% have breakeven production levels under the $50 mark.
Clearly, most shale producers are looking to ramp up output at current oil prices. Most alarming, however, is that production costs may be in the $20 range for most shale producers. How is this possible? Because drilling constitutes 30% of a well's total cost, ongoing operating costs are actually much lower than total breakeven levels. New companies have emerged, raising large amounts of capital for growth and acquisitions. They are likely viewing distressed properties for their ongoing operating costs, not their sunk drilling costs.
Don't count on U.S. crude production to continue falling due to curbed shale production. It's very possible we see sustainable oil production growth at or even below $50 per barrel.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
