U.S. shale drillers appear to have abandoned risky financial strategies that exacerbated the dot-com meltdown and made the recent oil bust far more painful for Houston companies and their employees.
In recent months, investors have demanded executives focus on delivering investment returns and fueling operations with their own cash instead of running up large debts or diluting shares in stock sales to pump ever-increasing amounts of oil.
It's a big change for a boom-and-bust industry, but oil companies seem compliant, even restrained, so far. Though oil prices have surged toward $60 a barrel in recent weeks, the number of working U.S. oil rigs hasn't skyrocketed. In fact, the oil-rig count has barely budged since early November.
"The hype is over," said Chris Midgley, global head of analytics at S&P Global Platts. "We're seeing a change in their behavior and mindset. The dot-com-boom mentality has dissipated. Now there's a really strong focus on accountability."
Midgley believes investor pressure will keep the U.S. oil industry in line in 2018 after energy companies underperformed in the S&P 500 Index this year. He also thinks banks will tighten their purse strings for oil producers; that oilfield-service companies will have to raise prices; and that the world's oil stockpile will decline next year.
Those are just some of the things Midgley and others predict for 2018, a year that could bring the oil industry further out of its financial straits, as long as crude prices remain elevated.
U.S. oil edged down 33 cents Wednesday to settle at $59.64 a barrel, but the price is up 11 percent from the beginning of the year.
Another thing that might happen next year is a wave of corporate acquisitions of companies that exited bankruptcy court led by new owners, their former bondholders.
Dallas law firm Haynes & Boone, which tracked the bankruptcy cases of more than 130 debt-laden North American oil companies, said most of the time, bondholders end up as shareholders after a company is reorganized in bankruptcy proceedings.
"They're interested sellers because they never intended to own an oil company," said Buddy Clark, a Houston partner and co-chair of the energy practice group at Dallas-based law firm Haynes & Boone. "Those bondholders are not oil men. They're bond traders."
Higher oil prices, Clark said, could mean more of these transactions.
Higher prices could also mean oil companies will pursue litigation more often, said Brit Brown, Houston managing partner and chair of the energy sector team at the law firm Akerman.
The oil downturn, Brown said, had led companies to cut their in-house legal departments, forcing the departure of experienced personnel who had built relationships with other companies that proved useful in heated disputes.
During the downturn, companies were shying away from litigation and arbitration because it is not cheap or quick. But now that oil-company budgets are stabilizing, in-house legal departments are being rebuilt and companies are assessing "their legal docket, what needs to be addressed and what needs to be let go," Brown said.
"There seems to be a greater willingness to pursue a legal right," he said. "Smaller and midlevel commercial disputes are now being raised."
Unless the oil market sinks again, the benefits of higher crude prices will have to spread across the energy industry. Next year, Midgley said, oilfield-service companies will have to raise their prices to avoid financial disaster. A majority of both drilling contractors and hydraulic-fracturing companies are on negative credit watch at S&P.
"That's unsustainable," Midgley said. "Prices have to go up. That's a very strong indicator costs have to move in one direction only. They have to start earning returns, as well."
That could make it more expensive to pump oil next year. Investors are expected to keep a closer eye on the economics of wells in the oil patch. They've taken companies to task for advertising high rates of return on wells without taking into account factors such as lease and debt costs that reduce the ultimate investment return.
For some of these wells, returns are a tenth as profitable as advertised.
"You're looking at $65 a barrel oil being roughly the break-even level," Midgley said. "The industry is being held a lot more accountable."
That's one reason Midgley thinks it is unlikely U.S. drillers will lead a massive rebound in production next year. He believes oil companies are going to keep the rig count flatter and attempt to manage operating costs more carefully.
But can the entire oil industry resist the pull of higher prices? The big companies can, but smaller ones probably won't, said Aaron Brady, an oil market analyst at IHS Markit.
"We're skeptical that the industry as a whole will live within its cash flow," Brady said. "The industry could outspend cash flow by 25 percent and capital markets are willing to fund that, especially when prices are rising."
Next year, Brady said, it's going to be harder for oil companies to boost production than it was this year. Shale wells have sharp decline rates in the first year of production, but that natural decline eases in the second and third year.
In 2017, oil companies were increasing production with low decline rates because far fewer wells had been drilled in 2015 and 2016. Next year, oil companies will have to replace barrels lost in the younger, faster-depleting wells drilled in 2017.
Still, Brady said, if U.S. oil companies can manage to boost production to record levels as the Energy Department expects, that growth could present a dilemma for OPEC and Russia, which have curbed production in an effort to support oil prices.
"That kind of growth is going to keep a lid on prices," Brady said. "How long will OPEC and Russia be willing to put up with that?"
