Why Shale lacks development in the oil and gas sector?

In the oil and gas sector, a new report finds that shale drilling is still largely uneconomic, echoing criticism of too much hype surrounding the Saudi oil minister's shale last week. Not only that, but the costs increase and the drillers pursue an "irrational production". Al Rajhi Capital, based in Riyadh, has uncovered financial data from a long list of American shale companies and found that "despite rising prices, most of the companies surveyed are still losing money and are showing no sign of improvement".

 The average return on assets for American shale companies "is still a measly 0.8 percent," wrote the financial services company in its report. In addition, much-publicized efficiency gains may be overestimated, at least according to surveys. The company said that in the third quarter of 2017, the "average operating cost per barrel remained broadly the same without any efficiency gains". Not only that, but the cost of producing a barrel of oil, after taking into account the cost of spending and higher debt levels, actually increased significantly.

Shale companies often post their lowest equilibrium prices, and often use a narrowly defined measure that includes only the cost of drilling and production, leaving aside all other costs. But since there are many other expenses, focusing solely on operating costs can be a little misleading.

The report concludes that operating costs have actually decreased in recent years. However, a broader measure of "cash per barrel", which includes other costs such as depreciation, interest expense, tax expense, and drilling and exploration expenses, reveals a more overwhelming.

In the oil and gas sector, studies show that this measure of "cash requirement per barrel" has increased for several consecutive quarters, averaging $ 64 per barrel in the third quarter of 2017. During this period, WTI has traded much lower, basically means that average shale player was not profitable.

Not everyone is posting poor figures. Diamondback Energy and Continental Resources was $ 52 and $ 37 per barrel in the third quarter, respectively, according to the investigations report. Parsley Energy, on the other hand, is worth more than $ 100 per barrel in the third quarter. A long list of shale companies have promised this year, with an emphasis on profits from the oil and gas products.

 It remains to be seen if that will happen, especially given the recent run up prices. But the question is not supposed to be in a better position. "Even when capex declines, we are unlikely to be able to pay the price of a product". In other words, reducing the burden of lower production and lowering the cost of living. All the while, interest payments need to be made, which could be on the rise if debt levels are climbing. One factor that has worked against some shale drillers is that the advantage of hedging future production has all but disappeared. In FY15 and FY16, the companies surveyed realized earnings on the order of $ 15 and $ 9 per barrel, respectively, by foreclosure in future production. But, that advantage has vanished. In the third quarter of 2017, the same companies only earned an extra $ 1 per barrel on average by hedging.

This is part of the reason for rising prices, a flattening of the future curve. Indeed, recently WTI and Brent have shown a strong trend towards backwarding - in which longer-term than-near-term. That makes it much less attractive to lock in future production. It has been noted that more recently, shale companies have been able to suspend their locking in hedges, which could not be reduced to a lower price.

Drilling is clearly on the rise and U.S. oil production is expected to increase for the foreseeable future. But in the oil and gas sector, the lack of profitability remains a significant problem for the shale industry.