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By Robert Cyran
(Reuters Breakingviews) – The United States’ transformation into the world’s biggest oil producer has been dramatic. It is also mostly over. Thanks to a combination of declining prime acreage and modest market prices for oil, the name of the game for the producers who turned American shale patches into free-flowing gushers is now to wring value out of what they’ve got. Monday’s $47 billion deal to combine Devon Energy and Coterra Energy in an all-stock merger is a preview of exactly what it looks like when a growth spurt ends, and an oil boom’s mature middle life begins.
U.S. oil production has risen sharply over the past decade, largely thanks to hydraulic fracturing, which opened up shale formations to exploration and exploitation.
However, a new well’s output tends to decline by 80% over two years. Producers are burning through their best virgin acreage. In some oil basins, like North Dakota’s Bakken, production is already declining. Ordinarily, a driller might just open up new wells. The problem is that oil companies need about $62 per barrel to break even in the Delaware sub-basin of the Permian, according to a recent Dallas Fed survey. That’s up from $52 a barrel in early 2020, and will rise further as the best land is drilled. Uncertain U.S. energy policy and tariffs on inputs like steel won’t help. The crucial West Texas Intermediate benchmark sits right on the cusp, just under $62.
Slamming together Devon and Coterra, which have deep holdings in the Permian, therefore makes sense. The companies estimate that combining their operations should deliver $1 billion of cost savings. Taxed at the statutory corporate rate and capitalized, they might be worth around $8 billion, split between both sets of shareholders roughly evenly.
That surplus can help bring down break-even well costs, but with the economics of new development on a knife-edge, it’s better returned to shareholders. Devon already planned to go down that road in 2026. Now the company is pledging to raise its dividend by over 30% after the deal’s close and buy back over $5 billion of stock.
Key for Devon, and other U.S. shale producers, will be to use their status as a marginal producer wisely. Their spigots can start up in a fraction of the time of conventional wells; by holding their financial firepower in store, they can rush to capitalize on any spike in oil prices. The industry’s boom and bust history doesn’t ordinarily inspire confidence in such savvy planning. A bit of consolidation might be the sign of wisdom accompanying this oil cycle’s advanced age. Follow Robert Cyran on Bluesky.
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