Has the U.S. Energy Sector Finally Learned Its Lesson? It Seems So.

Old habits die hard if they die at all. We tend to relapse into bad habits a few times before finally kicking them for good. For the U.S. energy sector, its bad habit of undisciplined drilling activity whenever oil prices enjoy a heady rally has undermined the sector’s prosperity in boom times and brought the industry to its knees three times since 2009, resulting in nearly 550 energy-related bankruptcy filings since 2015¹.

That’s more than a bad habit, it’s an addiction — enabled by breakthroughs in drilling technology since 2005, namely horizontal drilling and pad drilling in unconventional oil plays, that made new well drilling more efficient and less costly. The temptation for energy producers to “drill, baby, drill” when oil prices are strong is understandable as much as it is irresistible.

In that respect, the U.S. energy sector has been a victim of its own success. For over a decade, independent energy producers were singularly focused on acquiring acreage and increasing drilling activity and production as oil prices consistently held above $75 per barrel and topped triple digits several times. Such investment activity was financed by internally generated cash flow and debt financing, causing industrywide leverage metrics to increase sharply in the last decade. Oil production from major continental shale plays and other tight oil formations made possible by these drilling innovations has more than doubled since 2010, making the United States the world’s leading producer of crude oil for the last several years. That incremental U.S. oil production — some six million barrels per day — combined with Saudi Arabia’s unwillingness to counter overproduction by other OPEC countries has been sufficiently large to have a notable impact on global supplies and oil prices, resulting in two damaging downcycles for the U.S. energy sector over the last six years, mostly due to oversupply.

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Footnote:

¹: Haynes Boone, Energy Roundup