Drilling cuts across US shale plays could contribute to the nation’s oil production falling this year despite some forecasts to the contrary, EOG Resources Inc. executives said, adding they also believe crude oil futures prices could rebound quickly.
Industry response has been mixed as companies work to preserve cash flow for oil and gas operations.
EOG’s strategy is to slow oil production growth for 2015. Since 2009, EOG has increased its oil production by about 50%/year.
William R. Thomas, EOG chairman and chief executive officer, said EOG plans to cut spending by about 40% in 2015 vs. 2014. EOG also plans to reduce completions by almost half compared with 2014.
During a Feb. 19 conference call, Thomas said budget cuts by industry will be enough to prevent US production from growing and could contribute to falling production by Dec. 31.
"We do not think it’s wise or prudent to accelerate oil when oil prices are low, especially when the rebound in price could come this year or maybe even next year," Thomas said.
Calling the price downturn "short cycle," EOG expects its companywide production will reach bottom during the second and third quarters, with 2015 production coming out flat compared with 2014.
"Our returns-focused capital discipline has been at the core of EOG’s culture since the very beginning," Thomas said. "We are confident we will continue to earn healthy returns on our capital program during this commodity down cycle."
EOG’s primary goal for 2015 is to position itself to resume long-term growth once oil prices recover.
Analyst comments
David Zusman, managing partner and chief investment officer of Talara Capital Management, said companies allocated 2015 spending toward their best assets while they find creative ways to work with their creditors and banks this year.
Companies with the greatest asset flexibility will also be the ones most capable of managing their balance sheets during the price downturn, Zusman said, adding the companies most at peril are the ones having the highest debt.
"We think there are many companies that did overleverage themselves and bought property at the fringe of plays," Zusman said. He expects some consequences for those companies later this year. "We would not be surprised if 10-15% of the industry undergoes some very significant restructuring, but this sets up some excellent investment opportunities," he said.
Operators react to downturn
Encana Corp. Chief Executive Officer Doug Suttles said the price collapse could trigger more mergers and acquisitions across the industry.
"The longer this [crude oil price] environment persists, the more likely something will occur," Suttles said of the likelihood of mergers and acquisitions. "Low points in the commodity cycle are usually the most exciting times."
Encana assumes it can reduce costs about 15% overall, Suttles said, adding the company has secured discounts of as much as 50% in some areas following talks with drillers and other contractors.
Suttles plans no job cuts this year because Encana cut its workforce by about 25% during 2014. But he expects the number of employees still will fall because Encana might not to replace all retiring workers.
Noble Energy Inc. and Marathon Oil Corp. executives have said they expect to boost production this year. Apache Corp. expects its 2015 oil production will be flat compared with 2014. Magnum Hunter executives say they are waiting for service costs to come down 40%.
Gary Evans, chief executive officer of Magnum Hunter, noted the company sold most of its South Texas Eagle Ford shale assets and North Dakota Bakken formation assets except for some holdings in Divide County ND.
"Only 10% of Magnum Hunter’s production is oil," he said. "I am very bullish on natural gas long term…. Gas prices have taken a pretty big hit as well…. We will have to deal with cheap gas for a year." Meanwhile, Magnum Hunter started looked for a financial partner to help weather the downturn.
"We are talking to institutions about a $350-500 million joint venture," Hunter said in January. "We will mostly get a drilling carry. We are looking for an investor who is looking for a rate of return and then they go away." He said he hoped a joint venture announcement would be made in March.
Marathon Oil Pres. and Chief Executive Officer Lee M. Tillman said Marathon was focusing on its high-margin, high-return assets this year.
"Though our US resource plays generate competitive returns at current pricing, we’re taking action to materially reduce our 2015 capital program relative to 2014 to protect our financial flexibility," he told investors and analysts.
Price downturns underscore the importance of an asset’s subsurface quality, he said, adding Marathon has premier holdings in the Eagle Ford, Bakken, and Oklahoma resource basins.
While awaiting a commodity price recovery, Tillman said he would "pursue all options to expand our margins during this period of uncertainty--capital efficiency, investment high grading, early capture of service cost reductions, expense management, and operational reliability."
During 2015, Marathon plans to evaluate downspacing options, completion designs, and "co-development" possibilities to add to its unconventional reserves, Tillman said.
