By Jennifer Hiller
HOUSTON, Dec 5 (Reuters) - The recent nosedive in crudeprices came just as shale producers had started deliveringhealthy returns after years of heavy spending to boostproduction and market share.
The shift has pleased investors who had grown weary ofwaiting for a payoff while watching the frenetic west Texasshale boom make the United States the world's top oil producerand a major exporter.
The 29 percent drop in U.S. oil prices since October nowthreatens those improved margins, and sustained prices below $50could dent the value of shale reserves, which banks use todetermine borrowing power.
Activity in the largest U.S. oil field could fall 10 to 20percent next year if prices stay down, said Steven Pruett, chiefexecutive of shale producer Elevation Resources LLC. The priceretreat sparked a sell-off of shale firms' shares and anothersetback could sour investors on the sector for years.
The dynamic leaves shale producers hoping for a rescue inthe form of production cuts from The Organization of thePetroleum Producing Countries (OPEC) when it meets on Thursday -and at odds with U.S. President Donald Trump, who has pushedOPEC to keep the taps wide open.
Although Trump has generally been a boisterous booster offossil-fuel firms, he has ridiculed the prospect of OPECproduction cuts as "ripping off the rest of the world" byartifically inflating consumer fuel prices.
In November, Trump praised Saudi Arabia on Twitter for highproduction that helped push oil prices down about 30 percent tonear $50, calling it "like a big Tax Cut."
Such tweets are an "irritant" to a U.S. oil industry tryingto solidify its profitable position.
Trump's "leaning on" Saudi Arabia, the most influential OPECnation, "has had a great effect," Pruett said.
"To me, it's a lot of meddling," he said.
Trump's campaign against OPEC cuts comes after he stood bythe kingdom and Saudi Crown Prince Mohammed bin Salman despiteU.S. politicians calling for sanctions over the October killingof journalist Jamal Khashoggi at Riyadh's consulate in Istanbul.Prince Salman wants to avoid confrontation with Trump, Saudiwatchers say, including over oil production cuts and prices.
While shale producers have made strides in recent years atturning profits with lower oil prices, they are nearing athreshold where some would scale back investment, said PhilFlynn, an analyst at Price Futures Group in Chicago.
"The reality is a lot of them get scared at $50, and theirbankers get scared at $50," said Flynn. "They want OPEC to makea cut, and they kind of want Donald Trump to stop tweeting aboutoil."
U.S. oil production will rise 17 percent this year toaverage daily output of 10.9 million bpd, and hit 12.06 millionbpd by mid 2019, according to U.S. government estimates. Afteryears of increasing capital spending, companies includingAnadarko Petroleum Corp plan to freeze or cut thosebudgets, passing the savings to investors.
Even if OPEC pulls back and global prices stabilize atcurrent levels, it may not be enough for shale to regaininvestor favor, said Bruce Campbell, president of advisersCampbell, Lee & Ross Investment Management Inc. The firm ownsRoyal Dutch Shell shares because of its strong dividend andbalance sheet, but no longer sees a reason to invest in shale.
Shale companies can cut costs further, "but it takes 12 to18 months to roll through the system" and get profits risingagain, he said. Without higher crude prices, it will be toughfor investors "to find a place to get excited about," Campbellsaid.
SHALE RESILIENCE
Since the 2014-2016 price war between OPEC and shaleproducers - when soaring global supply pushed per-barrel pricesdown into the $20s - west Texas shale drillers have learned towring profits at prices as low as $38 a barrel, down from about$71 in 2014, according to consultancy Rystad Energy.
But breakeven prices in other U.S. fields range from about$43 to $48 per barrel, not far from November's low.
Meanwhile, Middle East producers' costs are about $11 abarrel in Iraq, less than $17 in Saudi Arabia, and less than $21in Kuwait, according to Rystad.
These countries, however, need much higher prices to financetheir state spending. In Saudi Arabia, crude would have toaverage $85-87 a barrel to cover this year's state budget, anInternational Monetary Fund official said.
The U.S. industry is still expanding the use of moreefficient drilling techniques, and oil majors' BP Plc,Chevron Corp, and Exxon Mobil Corp are expandingshale operations and building pipeline infrastructure to keepproduction rising.
“Shale is a scale business,” said Shawn Reynolds, aportfolio manager at investment firm VanEck.
He sees an industry just now poised to move out of itscostly development phase and into what Reynolds calls "harvestmode," pulling profit from past investments.
But a continued price decline would threaten recent robustearnings. Last quarter, ConocoPhillips profit rosefour-fold over a year earlier aided by cost cuts that"significantly improved our resilience to low prices," ChiefExecutive Ryan Lance said during an earnings call last month.
Anadarko swung to a profit and said it expects toincrease production 10 percent to 14 percent next year, assuming"$50 oil,” said CEO Al Walker.
Other producers are counting on a replay of 2016, when OPECcut output and prices gradually increased.
"I've been through it before," Bob Watson, CEO of Texasshale producer Abraxas Petroleum Corp, said in aninterview. He has told his employees not to worry about theprice: "It will come back. You just need to keep executing."
Watson, like other large shale companies, used financialderivatives to lock in some of its future production at $56 abarrel, a move that lets it ride out the recent drop barring asustained change.
LESSONS FROM THE PRICE WAR
Non-OPEC oil output will rise by 2.3 million bpd this yearwhile oil demand should grow by a 1.3 million bpd next year,projects the International Energy Agency, which advises majoroil consumers on energy policy. That could lead again to amarket awash in oil, lowering global prices.
OPEC this week must decide whether the global economy willneed more oil or less. After months of producing well below thegroup's target, group leaders increased production last summerand by October had added nearly 400,000 barrels per day overSeptember. Russia also increased its production by about 460,000bpd above its cap.
"OPEC realizes that in the last downturn, in an effort tograb market share, they got nowhere. They ended up losing marketshare to some extent," said Muqsit Ashraf, senior managingdirector for energy at consultancy Accenture Strategy.
One lesson from the last price war is shale can expandproduction even at prices that hurt OPEC members' budgets, saidKarr Ingham, a Texas oil and gas economist.
Companies in the Permian Basin pumped 1.6 million bpd inJune 2014 when prices peaked at $107 and output rose to nearly 2million bpd two years later as prices fell to $26, according todata from the U.S. Energy Information Administration.
"OPEC can wait from now until kingdom come, but they won'tget … a production decline" from the Permian field, Ingham said.
(Reporting by Jennifer HillerEditing by Gary McWilliams and Brian Thevenot)
