U.S. shale drillers score a cash flow bonanza thanks to OPEC+ cut

OPEC's surprise decision to slash oil production stands to enrich an unexpected cohort: U.S. shale drillers.

The shock announcement sent U.S. oil prices up by as much as $6 a barrel, signaling a new round of windfall profits for the shale industry that once was OPEC's fiercest foe. At the same time, the development bodes ill for consumers already squeezed by rampant inflation and facing the threat of surging gasoline prices as the summer driving season approaches.

And with shale executives having already pledged to hold oil output mostly steady this year so they can focus on enhancing investor returns, fuel prices in the world's biggest economy will be largely dictated by production decisions made in far-flung places like Riyadh and Luanda.

"One thing is for certain, OPEC is in control and driving price, and U.S. shale is no longer viewed as the marginal producer," said James Mick, a senior portfolio manager at Tortoise. "OPEC wants and needs a higher price, and they are back in the driver's seat to obtaining their wishes."

U.S. drillers have been swimming in cash after the surge in oil prices over the last few years.

A further boost for shale companies will cheer investors. Shareholders in U.S. oil companies reaped a $128 billion windfall in 2022 thanks to a combination of global supply disruptions such as Russia's war in Ukraine and intensifying Wall Street pressure to prioritize returns over finding untapped crude reserves.

U.S. production growth is less than half of what it was before 2020, with overall output yet to return to pre-pandemic levels. Major forecasters see growth of just 500,000 barrels a day or so this year from the Permian Basin, the country's fastest-growing shale field, less than half of the more than 1 million barrels a day of cuts announced by OPEC+ on Sunday.

"OPEC and shale are much more on the same team now, with supply discipline on both sides," said Joseph Sykora, a Dallas-based fund manager at Aptus Capital Advisors, which has $4.25 billion under management. "It really puts a floor under the price of oil long term."

It's a sharp contrast from much of the past decade, when U.S. shale was a thorn in OPEC's side, using cheap money to revitalize old and thought-to-be tapped-out oil fields with new fracking technologies. The U.S. oil sector's spectacular growth added more crude to global markets from 2012 to its 2020 peak than the entire current production of Iraq and Iran combined. That growth irked the Organization of Petroleum Exporting Countries and its allies, which saw its market dominance threatened like never before.

But surging U.S. production growth did little for shareholders, who routinely saw executives ratchet up debt as they plowed more money into new wells. The plunge in oil demand during the pandemic sent many smaller drillers into bankruptcy, and those that survived vowed never to repeat the strategy of chasing production growth at any cost.

With the OPEC+ decision helping to provide a floor to oil prices, companies like Patterson-UTI Energy can better plan activity levels, said Andy Hendricks, CEO for one of the biggest providers of drilling rigs and frack crews.

"It gives a little more clarity than what we've had," Hendricks said in a phone interview. Higher oil prices may eventually entice shale explorers to drill and frack more, but that will take some time, he said.

"There really isn't excess" gear and crews available, he said. "We could reactivate some rigs, but you're six to nine months out. So if somebody wants to do it by the end of the year, they need to call now."

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Bloomberg's Kevin Crowley contributed to this report.