How The OPEC Deal Makes Texas Shale a Big Winner

Thu, December 01, 2016

The deal to reverse the previous policy of letting the taps flow freely sent crude prices soaring more than 8 percent in London and New York and swelled the U.S. oil industry's market value by more than $80 billion, more than the entire annual economic output of nations such as Kenya or Croatia. The top 18 performers on the Standard & Poor's 500 index were energy companies.

"The announcement this morning on OPEC cuts is certainly near-term positive," Newfield Exploration Co.'s Chairman and Chief Executive Officer Lee Boothby said in a Bloomberg Television interview. "As you move up the price curve and you get more confident of the outlook for future pricing, we'll be able to add activity as cash flows grow."

The accord will have long-lasting impacts on worldwide crude supplies and elevate prices through at least the first half of 2017, said Chris Kettenmann, chief energy strategist at Macro Risk Advisors. First to pounce on higher prices by expanding drilling will be U.S. shale explorers, especially those in the Permian Basin of Texas and New Mexico, home to gushers prolific enough to spur a land rush despite the depressed state of the rest of the oil sector.

Some of the best performers in U.S. stock markets were those hardest hit by the downturn that started in mid-2014 and accelerated five months later when OPEC declined to reduce output. California Resources Corp. and Oasis Petroleum Inc. were among the day's biggest gainers, posting advances of more than 25 percent each. Continental Resources Inc., whose majority owner Harold Hamm predicted as far back as 2014 that OPEC would crack before U.S. shale drillers, surged 25 percent.

"Assuming OPEC makes good on an apparent production cut deal, U.S. oil production growth is all but guaranteed to return in 2017," said Joseph Triepke, founder of Infill Thinking, a Dallas-based oil research firm, and a former analyst at Citadel LLC's Surveyor Capital unit. "All U.S. tight oil plays will benefit, but none more than the Permian, where we estimate as many as 150 rigs could be reactivated next year if the OPEC deal holds."

That 65 percent increase would lift the fleet drilling new wells in the Permian to the highest since early 2015. Rig operators and the companies that help explorers fracture and perform other technical tasks involved in pumping crude from the ground jumped the most in seven years, mirroring the gains for oil producers buoyed by the OPEC deal.

The S&P 500 Energy Sector Index jumped to the highest since July 2015, led by Devon Energy Corp., Marathon Oil Corp. and Murphy Oil Corp. Deepwater rig owner Transocean Ltd. rose 18 percent. Halliburton Co., which helps explorers drill and frack wells, climbed 13 percent, its biggest advance since 2009.

The 15-member Philadelphia Oil Services Index rose the most in over eight years. The contractors that provide everything from the $700 million floating drilling rigs to the bolts on the gear that help stop oil wells from exploding have been hit the hardest during the two-year downturn, contributing the largest chunk of the more than 350,000 global layoffs. More than 100 oil service companies in North America have gone bankrupt during that time, according to the law firm Haynes & Boone LLP.

While an OPEC cut would be encouraging, investors should avoid "sharp recovery hype" and be selective, oilfield services analyst Matt Marietta told clients in a research note Wednesday.

"We reiterate our view that structurally oversupplied crude markets will take more time to balance," wrote Marietta, a Stephens Inc. analyst in Houston. "The math suggests an ongoing imbalance is likely to persist well into 2017, even with an OPEC cut, and no U.S. growth."

-Joe Carroll and Alex Nussbaum, Bloomberg