HOUSTON—In this crucial moment for North America’s oil and gas producers, they are advised to slow down their shale drilling pace but not kill it outright because the world still needs shale oil production. But at the same time, they need to improve their returns on capital invested, which during the shale frenzy were not good.

“Do we need to kill shale or slow shale? We are in the camp that says slow shale. That’s going to cause a painful environment for a while, but not as painful as if we kill shale. Shale growth needs to be slowed down, but not killed,” said Goldman Sachs analyst Brian Singer, who leads the firm’s energy, Americas, research group in New York. “How do you slow shale? You take away its credit card.”

Speaking recently to the Houston Producers Forum, Singer said, “We see U.S. production needing to slow from annual growth of 1- to 1.2 MMbbl/d [million barrels per day] to an average of 0.5- to 0.7 MMbbl/d in future years. In 2014 the world needed 0.6 MMbbl/d of U.S. oil growth, but it got 1.2 MMbbl/d. Lower prices will balance this in 2016.” Inventories will rise at first, then shales will balance the market in 12 to 18 months.

Singer said many shale plays are economic at $80 but he thinks costs are coming down by as much as 20%, which will move the breakeven cost down as well. Shale activity has flattened the cost curve and displaced higher-cost energy sources like deep water, production in Russia, LNG, tar sands and the fringe shales, he said.

Goldman Sachs sees U.S. capital spending coming down by 30% and the oil rig count by 700 from its October 2014 peak of about 1,600. “We expect to see a production impact in the third and fourth quarters for the companies in our coverage.

“We are turning rigs off right now but we think we need to turn the shale machine back on by yearend. Like The Terminator, we’re terminating rigs right now, but ‘We’ll be back.’ ” At the time he spoke in mid-February, Goldman was forecasting $40/bbl oil in the second quarter, $44 in the third and $58 by year-end.

“We do not think $40-50 oil lasts forever, but it does last a few quarters. Fringe producers will go away and there will be consolidation within the core of each play.”

Singer raised an important point about value creation when he questioned the worth of the shale revolution. “Volume growth has come at a price, with lower corporate cash returns. During the acreage boom and then the transition from chasing gas to chasing liquids post-2008, there has been a real return degradation.

“Your cash return on cash invested does not suggest there has been value creation in shale. We find that for every dollar you [the E&Ps] have invested, the equity market only gave you 50 cents credit. Balance sheets have weakened and E&P stocks have underperformed the S&P 500 for four years. Improve corporate returns without sacrificing asset quality and the stocks will follow.”

Where is the “new normal” going to be? Singer said producers can get the same return at $65 oil as they once did at $80 due to declining service and supply costs. The Marcellus and Utica shales, meanwhile, are still the best-positioned plays, and any associated gas that comes with oil wells is basically a zero-cost source of energy.

At the time he spoke, the stock market was pricing oil equities based on $65-70 oil, with Goldman reporting a neutral view on the space overall. Investors are looking through the woes of 2015, Singer said, calling the market “pretty rational” at this time.

Most of the upstream companies that issued high-yield paper have very little due in 2015-2016, with a majority of those issues maturing as late as 2018-19. Therefore, he does not see many bankruptcies ahead—but, he does forecast more mergers, saying there are some 600 operators of record in the U.S., including 53 public E&Ps.” It is too fragmented,” he said.