US independents stay thrifty at $50/bl

OREANDA-NEWS. June 15, 2016. The rise in oil prices to \\$50/bl is not enough to encourage US independents to loosen their budgets and expand drilling plans. Most want to see a more sustained oil price recovery before ramping up operations.

The cautious approach is in stark contrast to a year ago, when a rise to near \\$60/bl led many producers to add rigs and increase drilling activity. But a plunge to below \\$30/bl in the first quarter resulted in 77 bankruptcies in the US oil and gas sector. US onshore operators have cut their 2016 capital expenditure (capex) plans by as much as 80pc compared with last year and taken billions of dollars in impairment charges on their assets. "There is nothing magical about \\$50/bl," Pioneer Natural Resources' chief financial officer Rich Dealy says. "It is more about our view of the long term."

Total US crude output has declined for the past six months as producers sharply pulled back spending. US independents are increasingly confident that oil prices have bottomed out, but they have no immediate plans to increase drilling, the US Federal Reserve says in a recent survey. Activity has continued to decline and many oil and natural gas companies' financial positions remain weak. "Outlooks remained sombre for 2016, with little hope for growth before 2017," it says.

Anadarko Petroleum is not immediately planning to bring on line its inventory of drilled but uncompleted wells, "although the marginal economics of completing these today looks attractive", chief financial officer Bob Gwin says. "We would like to see moderately stronger commodity prices before we start moving into that inventory and eating through it."

Apache's has not deviated from an outlook given last month. "With the recent improvements in prices, we are prepared to increase capex, but will refrain until we are confident that cash flows have sustainably improved relative to our 2016 plan," chief executive John Christmann says. Apache has stuck with its \\$1.4bn-1.8bn capex plan for 2016. But "if the current oil price environment prevails, it is more likely that we will maintain or even increase drilling and completion activity," the company says.

Not yet well

The current price may also allow companies to work off some of their drilled but uncompleted wells in the second half of the year, to stem the average well decline rate of 25-30pc. And well completions in areas that offer the best returns "will generate much needed free cash flow to address debt reduction", US consultancy Wolfe Research says. But a \\$50-55/bl price range is still too low for most to redeploy rigs to target production growth. At an incremental cost of \\$80mn-100mn/rig, prices for 2017 need to be over \\$70/bl, it says.

But the increase in prices may have at least stemmed the downturn in drilling. The US rig count remained unchanged at 404 last week, ending 22 weeks of declines, US oil service firm Baker Hughes says.

And while the recovery in prices is not immediately translating into an increase in operations, it is providing much-needed relief for an industry struggling to service its debt amid a severe cash-flow squeeze. Many companies that have filed for bankruptcy in the Kansas City district, covering most of the midcontinent, expect to have enough liquidity to continue operations as normal throughout the insolvency process, the Federal Reserve survey says.

While conditions for oil and gas producers remain challenging, US banks' exposure to the industry is small and will not prevent financial institutions from meeting the credit needs of individuals and businesses, US banking industry group the American Bankers Association's chief economist, James Chessen, says.