Oil majors turn to borrowing as production faces structural challenges
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The oil industry finds itself at a crossroads, with declining rig counts and tightening capital discipline redefining the dynamics of U.S. production. Amid persistent low oil prices and cost inflation, oil companies are prioritizing shareholder returns through dividends and buybacks, often relying on borrowed funds. This strategic shift highlights a critical tension between maintaining production levels and satisfying investor expectations.
U.S. drilling activity hits post-pandemic lows
Recent data from Baker Hughes indicates that U.S. oil drilling activity has dropped to just 478 active rigs, barely above its post-pandemic low. Over the past two years, the rig count has steadily declined, falling 73 rigs below the levels seen during President Trump’s 2017 inauguration. Despite efforts to deregulate the industry, including executive orders to expand drilling in the Arctic and offshore regions, oil majors remain hesitant to ramp up production.
Persistent low oil prices and cost inflation
Commodity experts at Standard Chartered predict subdued drilling activity through 2025, citing real-term low oil prices that fail to justify new investments. U.S. liquids growth slowed significantly in 2024, and forecasts suggest further deceleration to just 367 kb/d in 2025. The combination of cost pressures and restrained pricing power limits the feasibility of rapid output expansion.
Borrowing fuels shareholder returns
Oil majors are increasingly relying on debt to sustain dividends and share buybacks. Bloomberg reports that ExxonMobil, Chevron, TotalEnergies, and BP collectively borrowed $15 billion between July and September 2024 to fund shareholder payouts. This practice underscores the growing pressure to deliver immediate returns despite a dimming outlook for oil prices. With cash shortfalls expected to persist, the reliance on borrowing raises questions about the industry’s long-term financial health.
Structural changes in U.S. shale
The U.S. shale industry has undergone significant consolidation, with mergers and acquisitions reshaping the landscape. The number of operators has declined, giving rise to larger, contiguous acreage managed by fewer players. This shift enables the use of advanced drilling techniques, including multi-pad wells with extended lateral sections, which have improved efficiency despite a reduced rig count. However, the maturation of key basins like the Permian has raised concerns about future production growth.
Goldman Sachs highlights that the Permian Basin, which has driven much of the recent growth, is showing signs of geological fatigue. The rig count in the region has declined by nearly 15% from its 2024 high and could drop below 300 by the end of 2025.
Balancing shareholder demands and production needs
The industry’s focus on capital discipline reflects a fundamental shift from the "drill-baby-drill" era to a more restrained approach prioritizing efficiency and returns. While technological gains have supported incremental growth, the limits of these improvements are becoming evident. Oil companies now face the challenge of balancing shareholder expectations with the need to maintain production capacity in an increasingly uncertain market.
As the industry grapples with these dynamics, the question remains whether this cautious approach will sustain long-term growth or exacerbate supply constraints in the years to come.
U.S. drilling activity hits post-pandemic lows
Recent data from Baker Hughes indicates that U.S. oil drilling activity has dropped to just 478 active rigs, barely above its post-pandemic low. Over the past two years, the rig count has steadily declined, falling 73 rigs below the levels seen during President Trump’s 2017 inauguration. Despite efforts to deregulate the industry, including executive orders to expand drilling in the Arctic and offshore regions, oil majors remain hesitant to ramp up production.
Persistent low oil prices and cost inflation
Commodity experts at Standard Chartered predict subdued drilling activity through 2025, citing real-term low oil prices that fail to justify new investments. U.S. liquids growth slowed significantly in 2024, and forecasts suggest further deceleration to just 367 kb/d in 2025. The combination of cost pressures and restrained pricing power limits the feasibility of rapid output expansion.
Borrowing fuels shareholder returns
Oil majors are increasingly relying on debt to sustain dividends and share buybacks. Bloomberg reports that ExxonMobil, Chevron, TotalEnergies, and BP collectively borrowed $15 billion between July and September 2024 to fund shareholder payouts. This practice underscores the growing pressure to deliver immediate returns despite a dimming outlook for oil prices. With cash shortfalls expected to persist, the reliance on borrowing raises questions about the industry’s long-term financial health.
Structural changes in U.S. shale
The U.S. shale industry has undergone significant consolidation, with mergers and acquisitions reshaping the landscape. The number of operators has declined, giving rise to larger, contiguous acreage managed by fewer players. This shift enables the use of advanced drilling techniques, including multi-pad wells with extended lateral sections, which have improved efficiency despite a reduced rig count. However, the maturation of key basins like the Permian has raised concerns about future production growth.
Goldman Sachs highlights that the Permian Basin, which has driven much of the recent growth, is showing signs of geological fatigue. The rig count in the region has declined by nearly 15% from its 2024 high and could drop below 300 by the end of 2025.
Balancing shareholder demands and production needs
The industry’s focus on capital discipline reflects a fundamental shift from the "drill-baby-drill" era to a more restrained approach prioritizing efficiency and returns. While technological gains have supported incremental growth, the limits of these improvements are becoming evident. Oil companies now face the challenge of balancing shareholder expectations with the need to maintain production capacity in an increasingly uncertain market.
As the industry grapples with these dynamics, the question remains whether this cautious approach will sustain long-term growth or exacerbate supply constraints in the years to come.