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HOUSTON (Reuters) – U.S. shale producers that spent the last year promising to control capital spending and adhere to strict financial controls are finding the lure of higher oil prices irresistible.
Several, including producers Parsley Energy (PE.N), Pioneer Natural Resources (PXD.N) and Continental Resources (CLR.N), this week joined others that already raised capital spending, citing higher costs and a desire to accelerate drilling and well completions programs amid strong pricing.
Last year, investors pressured shale companies, hard-bitten by the 2014 downturn in prices, to rein in spending and return more capital to shareholders through dividends and share buybacks, selling stocks of companies that spent more on drilling.
Oil prices have climbed by about 40 percent in the past year, with the U.S. benchmark CLc1 on Wednesday around $67 per barrel. That run up helped push U.S. production to a record 11 million barrels per day in July, increasing demand for services and tightening labor markets.
Derek Rollingson, portfolio manager of the ICON Energy Fund (ICENX.O), which holds shares of more than a dozen U.S. shale producers, said increasing capital spending makes sense with oil prices expected to rise in coming months.
“It makes sense in this environment given the strength of the forward (oil) contracts,” he said.
Continental Resources Chief Executive Officer Harold Hamm on Wednesday said oil prices could jump another 10 percent before leveling off, aided by U.S. sanctions on major oil producer Iran.
Pioneer this week said it would expand its 2018 budget by around $450 million, with roughly 60 percent of that due to rising costs and around 35 percent stemming from increased production activity.
Pioneer this year executed a $100 million share buyback program. When asked on its earnings call about the potential for additional buybacks, Chief Executive Officer Timothy Dove said the company would wait until it was generating positive cash-flow.
ConocoPhillips (COP.N) in late July added about half a billion to its capital spending plan, bringing its budget for the year to $6 billion. “This is money that is really bringing big benefits with it,” said Al Hirshberg, executive vice president of production, drilling and projects.
The company remained committed to financial discipline, executives added.
Top Bakken shale producer Continental increased its budget by roughly $400 million, with about half of that allocated to adding rigs and well-completions.
Continental does not hedge its oil production, something the company on Wednesday said had enabled it to better benefit from this year’s bump in oil prices.
Parsley Energy, which operates in the Permian Basin of West Texas and New Mexico, will add $100 million to $200 million to its budget.
Pioneer and Parsley both attributed some of their increased costs to tightness in the labor market, as well as fuel and electricity cost.
The unemployment rate in Midland, Texas, where many Permian workers are based, was 2.4 percent in June, well below the national average of 3.9 percent.
“We’ve had a more significant increase in costs this year than we would have assumed,” Pioneer’s Dove said during the company’s earnings call on Wednesday.
Dove expects pipeline constraints that are pushing down the price of Permian Basin crude to offset future increases in service costs, as companies opt to delay completing some wells.
He said service inflation would become a bigger issue in 2020 and 2021, when new pipeline connections begin to relieve bottlenecks, spurring operators to frack wells they had drilled when prices were lower but had not completed.
Rival independent oil producer EOG Resources (EOG.N) last week said it expected the industry to face between 5 percent and 10 percent inflation next year.
Reporting by Liz Hampton; Editing by Tom Brown
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