U.S. shale growth is expected to continue in 2022 but will likely be moderated by continued capital markets focus on disciplined capital allocation by producers.

As global oil demand continues to recover and prices remain robust, U.S. shale production is poised for continued growth in 2022 following a 70% increase in the contiguous U.S. (L48) horizontal rig count in 2021 that restarted production growth.

Continued U.S. oil production growth is supported by producer and oilfield services commentary suggesting a 10 – 20% increase in drilling activity by year-end. The increase in drilling activity will be largely realized in the first half of the year, with incremental changes in activity in the second half to be determined by prevailing commodity supply/demand balances.

We expect the oil majors and private producers to drive U.S. oil production growth in 2022. The oil majors are looking to invest capital to shore up their oil production profiles, while more nimble private producers are continuing to respond to commodity price signals with increased activity. Despite higher commodity prices, independent public producers continue to message capital discipline with minimal production growth. Public equity markets continue to ascribe minimal value to production growth and are rewarding capital allocation policies that favor returning cash to shareholders.

Geographically, we expect U.S. shale growth to be highly concentrated in the Permian Basin, which will gain market share in the U.S. L48. Private producers and the oil majors will grow their Permian activity and production, while public independents with multi-basin exposure should see Permian growth offsetting declines in other basins.

We expect U.S. shale gas activity to be more muted than shale oil, with minimal growth in 2022. Similar to independent public oil producers, public natural gas producers remain under pressure to improve their balance sheets and return cash to shareholders, despite commodity price signals. Beyond demands from investors, leading U.S. shale gas producers in the U.S. Northeast (public and private) face pipeline constraints that pose challenges to increasing activity levels. Producers in the Haynesville Basin near the U.S. Gulf Coast have the logistical ability to respond to commodity price signals but have maintained balanced capital allocation policies.

Until commodity fundamentals and market sentiment change such that public equity markets begin rewarding production growth, we will continue to see aggregate U.S. shale growth that is more moderate than its pre-COVID pace. Moderate production growth and current capital allocation policies are supportive for credit risk for energy companies, and anticipated U.S. production growth should temper, but is unlikely to overwhelm, the impact from a continued improvement in oil demand.