By: Peter Frerichs  

As the pandemic waned the Permian Basin (of West Texas and New Mexico) turned into a growth engine for US shale. Small, private drillers cleaned up but it would appear their most propitious spots are now tapped out. Many drillers are shedding rigs while their larger counterparts are sitting patiently on greater inventories of undrilled wells. 

US crude production is likely to remain tepid for the remainder of 2023. Moving forward some estimates point to fewer than 300,000 barrels a day in 2024 compared to this year. Company break-evens have increased by $5 to $10 due to the rising cost of materials with steel pipes in particular up approximately 40% compared to 18 months ago. 

When pandemic lockdowns were lifted the Permian basin saw an influx of smaller drillers. Russia’s invasion of Ukraine subsequently pushed the US benchmark past $130 and this quick rebound in US oil production was a boon for frackers. Yet, declining commodity prices and stubbornly high levels of inflation have pinched operator margins. The share of current private driller rigs in the Permian is now 42%, the lowest amount since May 2021. 

The break-even for companies in the Permian’s Delaware portion has increased over 34% since 2021 to roughly $43 a barrel. Meanwhile, in the Midland region of the Permian, the break-even is now $47 a barrel, an increase of 39%. US oil prices have averaged nearly $75 a barrel since January, a level that permits smaller drillers to remain profitable. However, sluggish natural gas prices are cutting into cash flows. Large companies, by comparison, are pumping out crude as prices fall and at the same time have become more efficient. Prominent firms such as Devon Energy, Pioneer Natural Resources, and EOG Resources have all reported break-evens under $50 a barrel.    

The decrease in rigs drilling for oil and gas is notable. At the beginning of the year, approximately 800 were operable, but that number now stands at around 670. Private drillers constitute nearly 70% of the decrease. Over the past three years, capital spending has plummeted. Compared to the three-year period of 2017 – 2019, capital spending over 2020 – 2022 fell by 70%. 

Some are protecting their inventory with an eye on September to test new potential. Shortfalls will persist if capital investments remain stagnant and companies spend to maintain as opposed to building out operations.