Shale getting stingy? Reinvestment rates in the US hit historic lows in Q3 shaping record free cash flow

Reinvestment rates among US shale oil producers hit an all-time low in the third quarter of 2021, resulting in a record free cash flow for the quarter, and are projected to fall even lower by year-end according to a Rystad Energy analysis. The analysis focused on a peer group of 21 public US shale oil producers, excluding majors, that together account for 40% of the expected 2021 output.

The peer group’s combined reinvestment rate in the third quarter of 2021 was 46%, down from 53% over the same period in 2020 and way lower than the historical average of above 130%. The reinvestment rate is calculated by comparing shale producers’ oil and gas capex against their cash flow from operations (CFO). The CFO of the last quarter was the strongest since the second quarter of 2019.

The analysis shows $7 billion in underspending by shale producers over the third quarter of 2021, comparing oil and gas capex with CFO. Operators managed to slightly increase peer-group quarterly capex in this year’s third quarter to $5.9 billion, up from $5.3 billion in the previous quarter, while further increasing CFO to $12.8 billion. All but one operator balanced spending in the third quarter of this year, reaching a new level of industry-wide cash balancing.

“Such a low reinvestment rate stands out for shale industry observers, especially as the peer group reported a record-breaking free cash flow (FCF) and earnings before interest, tax, depreciation and amortization (EBITDA) of $6 billion and $16 billion, respectively. But it’s not the end of the reinvestment slide,” says Alisa Lukash, vice president for North American shale at Rystad Energy.

Rystad Energy projections show that reinvestment will fall further to 40% in the fourth quarter of 2021. Also, for the first time since late 2018, the group’s combined net debt dropped below the eight-year average floor of $52 billion, coming in at $51 billion for the third quarter. Additionally, leverage ratios continued their consistent decline in keeping with the past three quarters.

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