Oil companies eye crude price drop but keep drilling

19 September 2014, HOUSTON – A 13 percent slide in crude oil prices since June has eroded some of the allure of drilling U.S. shale resources and raised investor concerns, but companies are pushing ahead as prices are still above the breakeven levels that might prompt a slowdown.

US-Lower-48-States-Shale-Gas-PlaysU.S. light sweet crude traded in New York has dropped to around $93 per barrel from $107 in late June as supplies pumped from oily rocks in Texas and North Dakota grow and a strong U.S. dollar makes imports more attractive.

On Thursday, shares of Bakken operator Continental Resources Inc stumbled as much as 8 percent after the company raised its capital budget for this year by $500 million to $4.55 billion and said some well completion techniques would be costlier.

The company also replaced a key executive. But oil’s price drop has not been enough to faze many in the industry, partly because companies have relentlessly worked to cut the time and the cost of sinking wells into shale and other rocks, helping salvage profits.

“Companies can now drill a well in seven or eight days when it used to take 30,” said Mike Breard, analyst at Hodges Capital Management. “That can make your oil or gas a lot more profitable.”

Breakeven prices to drill and transport oil range from $50 to $75 per barrel in the Eagle Ford in south Texas, $60 to $80 per barrel in North Dakota’s Bakken, and $65 to $80 per barrel in the Wolfcamp Shale in Texas’ Permian Basin, according to consultants at Wood Mackenzie.

“Most areas of the main plays are pretty decently placed to maintain their drilling programs,” said Phani Gadde, principal analyst at Wood Mackenzie. Deutsche Bank analyst Mike Urban said in a note on Thursday that despite the slip in prices oilfield services companies are reporting higher activity levels and producers are pushing ahead with spending.

Still, analysts at Bernstein Research, looking at earnings from 52 exploration and production companies, found that capital expenditures in the second quarter were $38 per barrel of oil equivalent (boe), exceeding cash flow from operations by $8 boe, a situation the firm sees as “unsustainable” given recent price declines.

Some producers are partially protected. Data from 15 energy companies analyzed by Oppenheimer & Co showed 38 percent of crude production is hedged this year at $96.71 a barrel, compared with 21 percent hedged at $91.54 next year. Oil majors, which tend to have higher cost structures than nimble shale companies, are used to riding out price dips and investing in massive projects that take years to build.

“The breaking cost for most supplies is in many cases $100 and higher,” Chevron Corp Chief Executive John Watson said this week.

“Our investments are made over a period of decades, not so much based on where prices could go in the next year.”
*Anna Driver, Terry Wade, Ernest Scheyder, Peter Galloway -Reuters

About the Author