US Shale to Deliver ‘Super-profits’ on Projected Record Cash Flow

The U.S. shale industry has developed a bad reputation when it comes to generating returns, but, according to analysts, that is about to change.

A Rystad Energy report projects publicly traded E&P companies in the U.S. shale sector are set to generate record-breaking free cash flows in 2021. Historically, shale producers have struggled to produce positive returns, which led the sector becoming one of the S&P 500’s smallest after investors fled the space. 

“In conjunction with the persisting low investment environment, E&Ps are enjoying super-profits,” Espen Erlingsen, head of upstream research at Rystad Energy, wrote in a June 23 report on U.S. shale producers.

Rystad estimates that all public tight oil companies will make close to $60 billion in free cash flow in 2021, before hedging effects. A key reason for the all-time-high free cash flow is the “turnaround in the U.S. tight oil industry,” according to Rystad.

Even before the oil market crash of 2020, the U.S. shale sector began an overhaul of its cash-intensive business model for one of capital discipline. However, last year’s oil price collapse at the onset of the global COVID-19 pandemic fueled a complete reset of the industry with the shale patch emerging with tepid growth.

“Oil demand has gradually increased after the initial shock of the COVID-19 pandemic, and OPEC+ continues to hold back volumes from the market,” Erlingsen explained in the report. “The consequent high price movement has been further supported by a slow ramp-up in U.S. tight oil activity.”

Rystad Energy estimates that total gross revenue for all public upstream companies is expected to increase by almost $500 billion in 2021, or 55% compared to last year—excluding hedging effects. At the same time, the investment level of these companies is only expected to grow by around 2% in 2021, resulting in significantly higher profits.

Typically, there has been a strong link between free cash flow and activity levels. Although U.S. shale’s mantra of capital disciple has all but bucked that trend.

New projects are making a comeback though, according to Rystad.

The firm reported the amount of greenfield investment that has been sanctioned as of June has already matched the full year 2020 total. It now expects the full 2021 level to be double that of last year.

Further, M&A activity in the oil patch has recovered in 2021, with transaction values increasing by around 30% compared to 2020, according to the Rystad report.

In conclusion, the Rystad report projected a $348 billion surge in combined free cash flow by the world’s publicly traded E&P companies in 2021. The previous high was $311 billion in 2008.

Both deepwater and offshore shelf are both set to recover this year with close to $60 billion in free cash flow. However, tight oil is expected by Rystad to surpass both these offshore segments.

For 2021, the conventional onshore supply segment is in line to earn its highest level of free cash flow  at close to $160 billion—but this is still behind the record reached in 2011, according to the report.