Last week, Bank of America Corp. forecast that Brent futures are set to fall to as low as $31 a barrel by the end of the first quarter from about $48 now – Bloomberg reported. That’s even lower than the $36.30 seen during the depths of 2008’s financial crisis.
If the market stays this depressed, analysts believe that global spending on exploration and production could fall more than 30 percent this year, the biggest drop since 1986, according to forecasts from Cowen & Co., a New York-based investment bank.
In response to this unprecedented drop, exploration companies have embarked on a course of cost cutting and redundancies. Last Tuesday, the oil services company Baker Hughes said it would lay off about 7,000 workers, or 11 percent of its work force. Halliburton, another services provider, which is buying Baker Hughes for $34.6 billion, said it planned to cut jobs, too. Magnum Hunter Resources CEO, Gary Evans, told Reuters he believes the costs of oilfield services will drop 40 percent in the next year as the market adjusts to low commodity prices.
So, how have American shale companies reacted in response to the bear market for crude oil?
Magnum Hunter Resources
Magnum Hunter Resources Corp. a small exploration company focused on natural gas production in the Marcellus, Utica, and Bakken shales, and whose shares have plunged 81 percent in the past year amid sinking natural gas prices, has announced in a conference call with its investors that the company will limit its spending to just $100 million this year.
The company, which concentrates on natural gas and natural gas liquids which account for approximately 90 percent of its production, expects to produce between 30,000 and 35,000 barrels of oil equivalent per in 2015.
During a conference call, the company’s chief executive, Gary Evans, assured investors that the company will continue to be profitable with natural gas prices at $2 per million British thermal units.
Natural gas for February delivery fell today to $2.916 per million British thermal units in electronic trading on the New York Mercantile Exchange.
The strength of Magnum Hunter, according to its CEO, lies in that it has managed to keep its production costs down. The company has no contracts locking it into using drilling rig or hydraulic fracturing crews, which will save money, Evans said. Magnum Hunter also managed to hedge 30 per cent of the company’s 2015 natural gas production – the maximum allowed by the banks.
When it comes to its current assets, Magnum Hunter does not plan on divesting its Bakken Shale acreage, although it has no plans to spend capital there on anything but well maintenance, Evans said. The company is seeking partners for a joint venture on its Utica shale holdings in Ohio, with a rough value of about $350 million.
According to John Hess, the CEO of Hess Corporation, with assets in the Bakken and the Utica shales, the company is well positioned to manage through the current price environment, with a strong balance sheet and resilient portfolio.
Greg Hill, President and COO, stated: “We are reducing our 2015 spending in the Bakken to $1.8 billion, compared with $2.2 billion in 2014. In 2015, we plan to operate an average of 9.5 rigs and bring approximately 210 new operated wells online, compared with 17 rigs and 238 operated wells brought online in 2014.
“Hess has some of the best acreage in the Bakken, and we will continue to drill in the core of the play which offers the most attractive returns. Substantially all our core acreage is held by production, which allows us to defer investment in the short term while maintaining the long term value and optionality of this important asset. As oil prices recover we will increase activity and production accordingly.
“In the Utica, we plan to spend $290 million compared with approximately $500 million last year, as we transition to early development at a measured pace in this price environment and as infrastructure builds out. Over 2015 our joint venture with CONSOL intends to execute a two rig program focused in the core of the wet gas window and bring 25-30 new wells online, compared with four rigs and 39 new wells in 2014.
Carrizo Oil & Gas
Houston-based Carrizo Oil & Gas also announced cuts in its budget but pledged not to abandon exploration of its Eagle Ford assets.
The company has cut its overall budget for 2015 by 30 per cent, which means that after the adjustment it is expected to spend between $450 million to $470 million to drill and complete wells in 2015, down from around $515 million last year.
Carrizo also revised its well costs in the Eagle Ford Shale by the fourth quarter of the year to $5.8 million from $7.5 million in November 2014.
The company’s President and CEO, S.P. “Chip” Johnson IV, also commented on the falling prices of oilfield services, saying that the company has saved 12 per cent compared with late 2014 service costs, and expects these costs to go down by another 20 per cent by the end of the year.
Carrizo Oil & Gas holds about 81,000 net acres in the Eagle Ford Shale, where despite reduction in capital spending, it expects to increase total oil production this year by 17 per cent.
The shale explorer Sanchez Energy also chose to cut its 2015 budget. It currently stands somewhere between $600 to $650 million – 30 per cent down from November 2014, which in turn was less than the $1.15 billion envisioned before oil prices started their decline in June.
“In response to the deteriorating commodity price environment, Sanchez Energy has elected to further reduce its 2015 capital plan to a range of $600 million to $650 million,” President and Chief Executive Officer Tony Sanchez said in a statement.
Despite the depressed oil and crude prices and cuts to its budget, the company expects to increase its production from its Eagle Ford assets to between 40,000 and 44,000 barrels of oil equivalent per day, which the company said would be a 40 percent increase from last year if sustained.
Swift Energy Company
Swift Energy Company, also based in Houston, Texas, plans to cut its 2015 spending by a whopping 75 per cent, down to around US$100 – $125 million.
Terry Swift, CEO of Swift Energy commented, “Our revised budget, representing a 70-75% decrease in spending from 2014, reflects the lower commodity price environment we face in 2015 and demonstrates our response during this down cycle. We continue to work with our vendors and suppliers to reduce service costs and are taking steps to materially reduce field level operating and corporate overhead expenses.”
Swift Energy Company, which focuses on oil and gas properties in onshore Texas and Louisiana and in the inland waters of Louisiana, did not cease exploration work. It has recently noted promising results from its four new Eagle Ford wells in the Fasken area in Webb County, Texas.
“We are pleased with our drilling and completion efforts in Fasken, as we have now drilled 14 consecutive wells with average initial production tests in excess of 20 MMcf/d. These results demonstrate that deploying customized, engineered completions in horizontal laterals drilled in precise target zones of the Eagle Ford shale improve the productivity of our wells,” Swift said in a statement.
As falling commodity prices bite into profits, more and more companies decide to wind down production, with Baker Hughes rig count showing more than a three per cent decline in rigs actively exploring for or producing hydrocarbons in North America.
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