West Texas and Brent Crude oil prices both dropped below $40 per barrel this week. Continued high production beside a decline in Chinese demand has made an already oversupplied market suffer.
However, U.S. shale drillers have only just barely cut back on oil production. According to Bloomberg, output from 58 such drillers increased by 19% since last year. That amounts to an increase of 4% per quarter as compared to last year.
With the supply glut as harsh as it is, you would think it would make more sense for those companies to cut back; after all, that oil is just getting cheaper.
Shareholders prefer to disagree.
By and large, it seems many shareholders would prefer to see company growth rather than immediate investment returns.
You see, it was continued drilling that made the U.S. one of the most prolific producers in the world, even surpassing oil major Saudi Arabia.
And many companies boast reduced costs that can keep projects affordable even at $40 oil. According to Bloomberg Intelligence, some companies have reduced costs as much as 20%.
At lower break-even costs, companies can continue pumping oil at regular rates. Even if expansions projects have to be put on hold, production can continue.
Chief Executive Officer at Cimarex (NYSE:XEC), one of these growth-over-returns companies, says, “We are not victims waiting for a rescue ship. That ship’s not coming.”
Oil and gas companies must fund their own growth in the low oil market if that’s what shareholders want to see.
Still other companies have taken a more cautious approach and cut back on production, arguing that returns will be better in the long run if the company waits for higher oil prices.
In either situation, these companies are all striving to save money. The oil market recovery seems to be slow-going, and any cost-cutting measures are a plus when they mean the difference between surviving the glut and going belly-up.
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Until next time,
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