As drilling picks up, winners and losers emerge among U.S. shale plays

Oil well
Source: DollarPhotoClub

While the U.S. shale industry seems to be picking up pace again, with 381 active rigs as of August 5, the highest number since March 18, according to Baker Hughes data, a sharp line emerges between the winning and the losing plays.

Following a 75 percent collapse in rig count from the highs reached in 2014, shale drillers are all about productivity, trying to squeeze every last bit of oil / gas from the formation. This is why they have turned their attention to the prolific Marcellus Shale formation and the Permian Basin in Texas, at the expense of less productive Eagle Ford and Bakken formations.

During Pioneer Natural Resources’ earnings conference call, COO Timothy Dove was buoyant about the Permian, saying “I’m confident the world needs the Permian. The Permian is going to be the future of the U.S. and help in world supply.”

“It’s got the best rock, obviously the best margins, and it will provide essentially the only growth long-term,” he said.

Jessica Pair, an analyst for Stratas Advisors expressed a similar sentiment when analysing the Permian in relation to West Texas Intermediate (WTI) prices.

“When the median well-level economics from 6,800 wells across the [Permian] basin is compared and ranked by vintage, the median breakevens have continuously trended downward since 2012,” she said.

“Currently, the median breakeven across the basin ranges from about $54/bbl to $64/bbl. When focusing on the top 25 percent of these wells by economic and production performance, the median breakeven decreases to a range of about $30/bbl to $33/bbl,” she said. “Under market conditions fluctuating between $40/bbl and $48/bbl, the top 25 percent of wells drilled within the Permian remain economic.”

The U.S. oil rig count has risen in nine of the last 10 weeks. Over that period in the Permian, drillers have steadily increased the count by 35 rigs to a total of 177. In the Williston Basin, which contains the Bakken, the rig count has fluctuated, between 22 and 27 rigs. Many analysts share the view of Timothy Dove, who considers it unlikely that production in the Bakken and Eagle Ford will ever get back to the pre-downturn levels.

Some say that even in the more prolific formations, the rig count increase might not last. According to recent data released by the U.S. Energy Information Agency (EIA) prices need to climb nearer to $60 a barrel for U.S. producers to have a “substantial” boost in activity. Currently, oil prices have slipped back from the highs of $50 per barrel in June, dipping to $39 a barrel before rebounding to above $41.

CNBC quotes Guggenheim Securities who say that the announcements by drillers thus far suggest a roughly 16-percent increase in rig activity by the end of the year. Analysts at Simmons said drillers could scrap some of the rig additions planned for the fourth quarter if oil prices continue to slide from June’s peak.

“The tenor of Q2 earnings calls have followed the descent in oil prices (and stock prices) — the earlier calls extolled more buoyant outlooks while the more recent ones have endorsed more defensive ones,” Simmons wrote.

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