January 3, 2020 / 6:30 PM / 20 days ago

U.S. shale producer shares spike with oil prices but pare gains

HOUSTON/DENVER, Jan 3 (Reuters) - Shares of U.S. shale producers spiked briefly on Friday as Middle East tensions boosted oil prices to an eight-month high, but the bump is likely to prove temporary and the companies will stay focused on cost-cutting in 2020.

Oil prices jumped as producers and service companies were evacuating foreign staff from Iraq for safety reasons after a U.S. air strike killed a top Iranian commander in Iraq.

Shares of Centennial Resource Development initially jumped as much as 8%, Whiting Petroleum gained 9%, WPX Energy and Continental Resources rose more than 3%. Shares pared gains as investors ruled out major impacts on world oil supplies.

Analysts said oil prices would have to rise much more to make a lasting impact on U.S. shale producers. They noted that the industry has yet to deliver consistent returns and most companies are committed to reducing spending.

“If this escalation results in sustainably higher oil prices, that obviously helps them,” said Josh Young, managing partner at oil and gas investor Bison Interests. “But it would require much higher prices to solve their problems.”

After a decade of poor returns on growing output, U.S. shale producers are cutting spending by 12% to 15% this year. Any improved profits from higher oil prices will likely go toward paying down debt and returning dividends to shareholders, said Richard Spears, vice president of oilfield consultancy Spears & Associates.

Shares of oilfield service firms also notched modest gains. Schlumberger and Halliburton rose less than 1% apiece.

“I doubt we see any meaningful increase in drilling activity in the U.S. until the price of oil rises over $70,” Spears said.

The U.S. rig count has fallen 26% in the past year while the number of active hydraulic fracturing spreads has tumbled to 290 from an April peak of 482.

In September, shale shares got a similar bump when an attack on Saudi Arabian oil facilities briefly raised crude oil prices to the low $60s per barrel level before falling back to the mid-$50s.

“The big issue facing shale is the core inventory depletion,” said Matt Portillo, research analyst at Tudor Pickering Holt & Co, referring to the rapid output decline in shale wells. “Drilling faster doesn’t do much for producers.”

Friday’s 3.6% move in near term oil contracts is helpful, but “it’s not a gamechanger,” said Ethan Bellamy, a senior analyst at Robert W Baird & Co. (Reporting by Jennifer Hiller in Houston and Liz Hampton in Denver; Editing by David Gregorio)

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