US independent oil and gas producers came close to breaking even during the first quarter of 2017 thanks to aggressive cost cutting and improvements in well productivity.
Some shale producers claim they can drill wells profitably at prices well below $50 per barrel and in some cases below $40.
But Harold Hamm, chief executive of Continental Resources, a major producer in North Dakota and Oklahoma, has said oil prices need to be above $50 to be sustainable.
Prices below $40 would force producers to idle rigs again, he said in a recent interview.
The renewed drop in oil prices, unless quickly reversed, looks set to put these conflicting claims to the test.
Fifteen independent producers with operations focused on the United States reported a combined net loss of $3.7 billion in the first three months of 2017.
But most of the losses were attributable to Marathon Oil, which reported a net loss of $4.9 billion, mostly as a result of an impairment charge linked to its Canadian oil sands businesses.
The other fourteen companies in the sample reported total net income of almost $1.3 billion, up from a loss of $9.9 billion in the first quarter of 2016.
Ten companies in the sample reported positive net income during the first quarter, up from just two in the previous quarter and none in the first quarter of 2016.
Financial performance for the companies in the sample has been steadily improving since losses peaked at $23 billion in the third quarter of 2015.
Shale producers have benefited from a combination of cost reductions, improvements in drilling efficiency and well productivity, and a significant increase in oil and gas prices.
The average price of WTI, the domestic benchmark, rose from $33 per barrel in the first quarter of 2016 to $52 in the first quarter of 2017.
The average price of gas delivered to Henry Hub rose from just $2 per million British thermal units to $3.07 over the same period.
But benchmark oil prices fell by 7 per cent in the second quarter, though gas prices were up 2 per cent. Both oil and gas prices have slid so far in the third quarter.
Given the precarious profitability of oil producers in the first quarter when oil prices were above $50, the slide in WTI during the second and third quarters will renew the pressure on drilling firms.
Unless there are further exceptional write-downs, the sample group may be able to increase their net income in the second quarter despite the fall in prices.
Many, though not all, shale producers have hedged the price of their output for the remainder of 2017 which gives them some protection in the short-term against the downturn.
But very little production has been hedged so far for 2018.
The current calendar strip means hedging is only possible for 2018 at a WTI price of around $47 — and many shale producers will actually receive less.