Analysis: US independents eye 2017 drilling boost

OREANDA-NEWS. September 08, 2016. US independents are preparing to boost their drilling activity in 2017 as oil prices stabilize, allowing them to shift gears to growth mode from hunkering down.

The oil market downturn that began in mid-2014 has given producers a window to shift away from output growth and focus on efficiency. In the process they have revamped technology, shed non-core assets and snapped up properties at bargain prices.

All those improvements mean that independents, particularly the larger players, are getting increasingly confident about operating in a low price environment even as many small to medium sized-producers have filed for bankruptcy.

"Despite the commodities bouncing around, fortunately consumer optimism seems to remain," Halliburton's president Jeff Miller said at an industry event. "It's better in the \\$40s than falling, but it's still a brawl in the market place."

As oil prices recover, shale oil will be fastest incremental barrel to return to the market. "That means it will be the first to fill demand, to fill the imaginary supply bucket," Miller said. Mature fields such as those in the Middle East will be the second and deepwater project the last because of the billions of dollars of investment and the time line of seven to 10 years needed from discovery to output. Unconventional fields will also fill the gap first because of the improvement in efficiency wherein one rig can achieve a lot more than it could about two years back.

"The bottom line is, it just doesn't take as many rigs as it used to, to drive frac activity," Miller said. "It doesn't take 1,900 rigs to get to equilibrium,"he said,referring to the peak US rig count in 2014.

Producers have been able to cut costs by concentrating on core areas. To simplify operations, Marathon Oil has shed assets and is acquiring properties to expand its core footprint. It has sold assets worth \\$1.3bn in the last 12 months, \\$300mn above the target, but it bought a private Oklahoma producer for \\$888mn in June.

The independent, whose exploration and production costs have fallen 30pc since the beginning of 2015 and unit costs down by 20pc amid those deals, will focus its spending in the STACK area and also in its acreage in the Eagle Ford and the SCOOP, also in Oklahoma, all of which offer returns of 40-80pc at \\$50/bl WTI. "The non-core asset sales beyond the proceeds they bring to the balance sheet, drive out higher unit cost operations and capture avoided capex," Marathon Oil chief executive Lee Tillman said at the same Barclays energy conference. "We simply can't optimize capital allocation on a non-optimized portfolio."

In a similar move in the Permian, EOG Resources will buy Yates Petroleum in a \\$2.65bn deal – the largest in EOG's history. "We really did it because we get primarily extremely strong acreage in the Delaware basin," chief executive Bill Thomas said today. "It helps us to drill longer laterals. There's a lot of synergy, there's a lot of cost reduction, there's a lot of cost savings in this." The independent, which sold assets worth \\$425mn in the first half of the year, now has almost all its wells that generate a 30pc rate of return at \\$40/bl oil price as part of a strategic shift toward what it called ‘premium drilling'. "We have reset the company dramatically over the last couple of years from a \\$95 price environment down to a \\$40 price environment," Thomas said.

For Apache, after hefty asset sales last year that included its massive Kitimat and Wheatstone LNG facilities in Australia, the focus over the past two years was on developing a new area called the Alpine High in Texas, spread across five distinct formations including the Bone Spring, Wolfcamp, Pennsylvanian, Barnett and Woodford. The area has in place reserves of 75 Tcf of rich gas and 3bn bl of crude in the Barnett and Woodford formations alone. It plans to increase its capital expenditure (capex) for the year by \\$200mn to \\$2bn, 25pc of which will now go to Alpine High, chief executive John Christmann said.

Pioneer's chief operating office Tim Dove reiterated plans to have 17 rigs in operation next year, after adding five in the second half of the year, with output growth increasing to 13-17pc. But it raised its output forecast for this year to 13pc from 12pc earlier.