Oil price decline would 'test US shale' plays, says Drillinginfo CEO

The ongoing oil price slump will test the mettle of US shale plays, but the kind of industrial bloodbath some have forecast is unlikely thanks to efficiencies of scale and the tenacity of independent upstarts, according to Allen Gilmer, co-founder and CEO of Drillinginfo.

Speaking to Sharecast, the industry veteran, who was an independent oilman himself before he co-founded the Austin, Texas headquartered energy data analytics firm in 1999, said: “This far into the current cyclical decline, we have seen a US shale industry that has reacted very well to the climate. It has been opportunistic, adopted an activity base level, and knows when to ratchet activity down if the oil price reaches that base level.”

Furthermore, with oil benchmarks lurking either side of $60 a barrel in recent months, Gilmer sees operators’ base level going steadily down.

“At $100 no one was looking for efficiencies because we didn’t need them; at $60 the industry needed to find the efficiencies and most, if not all, are doing a remarkable job on that front.”

Invariably, there would be distressed assets and companies, but unlike past downturns, the scale of distress and how it is managed would be very different.

“What we are seeing now isn’t reminiscent of 1986 or even 2009. This is down to a number of reasons. Unlike 1986, the idea of consolidation around the oil majors does not play anymore. Independents have more options when it comes to mergers, or assets changing hands.”

Additionally, unlike 2009 – a downturn triggered by a crisis of demand – few assets appear to be changing hands on the cheap at 10 cents on the dollar.

“The dollar bid/ask differential is still pretty wide for US shale assets, especially for good assets in the hands of efficient operators looking to divest for financial reasons. So if private equity firms or the majors intend to prize these assets away, it won’t be at 2009 prices.”

Gilmer admits there would be poor quality or poorly managed assets up for grabs on the cheap. “But market evidence suggests PE firms are sitting with billions of dollars in dry powder and not enough quality assets around to buy. So quality is key here.

“The way I see it is, following this testing phase, US shale assets would get into the hands of people who know what they are doing and can effectively manage quality acreage, rather than those who got on the shale bandwagon when a bonanza appeared on the horizon and ended up with mediocre [to poor] assets, paid an undeserved premium for it and hedged unwisely.”

As for the oil price itself, Gilmer opined: “In this beserk market, you can make a case for any oil price. It’s a case of fine margins, where a real-terms uptick in production can drive the price down 50-60% and a marginal undersupply scenario can drive it up twice as much with geopolitical permutations ever present in the background.

“The question I ask is – why is Brent even around $60 when there are tankers of West African crude docked out there struggling to find buyers. That's because even though oversupply is visible, it takes a snap development to shift the price either way in a perception and sentiment driven trade.”

Regardless of the volatility, US shale industry is here to stay, Gilmer said. “Market direction would depend [and move] on the capability of ownership. If anything, once the dust has settled, I expect a more robust and efficient US shale business, and there are signs of that already.”