Editor's note: This article first appeared in Hart Energy's Shale 2022 report. For more information and insights, view the Shale 2022 report here. 

As the calendar turns onto 2022, the shale industry finds itself in unfamiliar territory, but not totally unwelcomed territory. Both Henry Hub and WTI prices have surged and, perhaps more importantly, stabilized in the $3-plus and $80/bbl range, respectively. Global demand for energy is approaching global output, creating an environment for long-term supply/demand economics that should remain favorable for both producer and consumer.

But even beyond price and demand stabilization, the shale industry is enjoying something it hasn’t before, at least not to the extent that it is now: profitability. Discipline in spending, managed production growth and rising prices are leading to cash flow generation that investors have long demanded.

According to Bloomberg, free cash flow by U.S. oil producers will likely increase by 38% in 2022. Devon Energy reported free cash flow gains of $1.1 billion in third-quarter 2021, an 8x improvement over fourth-quarter 2020. During the third quarter, Pioneer Natural Resources reported free cash flow gains of $1.1 billion, EOG generated $1.4 billion and ConocoPhillips created $2.8 billion.

Even with disciplined capex, the modest growth practices enacted by shale producers are steadily moving the needle back toward pre-COVID-19 production levels. According to Rystad, shale production was expected to reach 8.68 MMbbl/d in December 2021, the highest since March 2020.

Part of the production growth stems from producers working through their DUC inventories. According to Rystad, the number of DUCs in major U.S. shale basins had fallen to 2,381 wells by June 2021; this was the lowest level since 2013. With the number of DUCs decreasing, U.S. producers are finally drilling new wells and subsequently deploying more wells.

According to Westwood’s U.S. land rig count, the number of operating land rigs by the week of Nov. 12 was 533, with more than half (272) in the Permian Basin. However, that figure is still far from pre-COVID levels. According to Westwood, there were 775 rigs operating in mid-November 2019.

Despite the still-depressed rig count, production levels are expected to continually climb. The U.S. Energy Information Agency (EIA) estimates the U.S. will produce 11.9 MMbbl/d of crude in 2022, nearly matching pre-COVID levels, and peak U.S. output of 12.2 MMbbl/d. The EIA explains that the growth in oil production “will come largely as a result of onshore operators increasing rig counts, which we expect to offset production decline rates.”

Meanwhile, the substantial free cash flow generation and continued production recovery is occurring at a time when the shale sector is needing to rapidly decarbonize. Between pressures from investors and simply retaining a social license to operate, shale producers are looking for new ways to cut down on their carbon and methane emissions.

Service companies are responding, bringing to market leading-edge technologies that cut down on CO₂ emissions and reduce flaring. But the oilfield services (OFS) sector, amid surging gains for producers, are also working to adjust pricing that ensures the OFS sector thrives in the same environment.

Going into 2022, producers should expect to see cost inflations to the tune of about 10%, according to a Goldman Sachs report.

The Shale Gale is long over, and such pricing and spending will not return to the sector. But so is the latest industry downcycle. In 2022 unconventional development is poised to return to pre-COVID production levels while generating billions of dollars in free cash flow and substantial returns to shareholders. While the shale industry of the past is receding in the rearview mirror, ahead is a new, cleaner, more profitable landscape that will ensure the shale industry will remain a key player in the new energy mix.

For more, check out Hart Energy’s Shale 2022 special report.