Apache to cut North American spending (US oil producer)

Fuel Fix ^ | November 20, 2014 | Ryan Holeywell

[thackney]

Apache will cut its North American capital budget from $5.4 billion to $4 billion, the company told analysts at a presentation in New York, but said it will be able to spend that money more efficiently.

The forecast comes at a time when oil prices continue to fall. Amid pressure from investors, Apache is working to shrink its portfolio to focus on North American liquids production.

Still, company officials said despite the sliding oil prices, they believe they can be successful.

“We’re very excited about what we can do at $80,” said Gary Clark, Apache’s vice president for investor relations. “The corporation is also very comfortable… even all the way down to $70.”

West Texas Intermediate, the U.S. benchmark crude, was trading at $75.11 per barrel Thursday morning.

Apache chief executive G. Steven Farris said the company will take a disciplined approach to spending, with capital expenditures within 10 percent of the company’s cash flow.

Generally, U.S.-focused exploration and production companies’ budgets are more susceptible to oil price volatility than those of major integrated companies.

Despite declining crude prices, Farris was undeterred. “We want to be the premiere North American, unconventional player,” Farris said. “This is not a pipe dream. We’ve done this before.”

The company is in the midst of a major effort to sell off assets, shedding more than $10 billion of them in recent years.

Farris said it would be “a hell of a lot easier if we got $100 oil” and acknowledged that crude’s price declines would limit the number of rigs it will run.

Despite the capital budget cut in North America, the company plans to spend its money more effectively, said John Christmann, the company’s chief operating officer for North America. Instead of allocating money to various regional divisions than then decide how to spend it in individual plays, the company has a new policy of viewing all of its North American plays as part of a single portfolio and funding them accordingly.

“Today we’re taking all the plays and looking at them as one big portfolio,” Christmann said. “There’s a lot fo plays that got capital that won’t get capital now.”

The company plans to steer 55 percent of its capital budget to the Permian — up from 47 percent in its 2014 budget . On the lower end, it’s steering 10 percent of its capital to Canada, which got 11 percent in the 2014 budget.

[Sherman Logan]

The problem with the theory, of course, is that providing massive financing to your enemies isn’t always the best strategy. :-)

[X-spurt]

I have always been under the impression that “Texas” oil was not the type difficult to refine, like that from Venezuela. And the reason our Texas oil markets at a lower price is more related to delivery capacity backlog from field to refinery.

I would be OK with being corrected, with facts not opinion.

[lacrew]

Aren’t there a few flaws with this line of thinking - namely transferring huge amounts of wealth to your enemies, and generally being under their thumb.

And how far out are we looking - if the Saudis have a 100 year supply, should we really sit back and not use our own for that entire period? In year 101 some fantastic breakthrough could make our oil supremacy moot, and there would be no ‘pay off’ at the end.

[con-surf-ative]

Exploration and production companies are not cutting back based on “this week’s” prices. They look at the futures strip (futures prices for years ahead) and their own economic forecast for pricing years into the future.

However, they are not going to commit capital to a drilling project unless, based on their best estimates of pricing and costs, the project will produce an acceptable rate of return. They frequently develop rate of return scenarios that will occur at different pricing levels, so that a project that may work at $100 oil would also work at $80 oil, albeit at a lower rate of return. At some price point, however, the rate of return falls below the acceptable level. That is when the companies begin to reduce capital expenditures.

Most companies have the flexibility to increase cap-ex budgets mid year should pricing improve. So the answer to your question is that companies use the best data available to them to decide on cap-ex levels, including price forecast, cost estimates and return of capital.

[American Constitutionalist]

Thackney ? How much will it help finanacially the smaller, weaker, companies that are hurting more from the lower oil prices with the these other larger or more finanacialy stable companies with these fire sale assets that they can buy at a discount ?
These assets can be bought at a steap discount and ahead broken down worthless equipment, assets and upgrade.

[American Constitutionalist]

Fire sale leases ?

[thackney]

Possible, sure.

Invest money to delivery your oil to Libya?
When you already have a delivery system to move your product?
Why would they do that?

[thackney]

I have always been under the impression that “Texas” oil was not the type difficult to refine, like that from Venezuela.

In general, that is true, but do not assume all oil in a given area is the same. Texas has some heavy crude and Venezuela has some light. On the Alaskan North Slope, there is Very Heavy crude laying on top of far lighter crude, and under that is more heavy. It is by the field, not the surface location.

And the reason our Texas oil markets at a lower price is more related to delivery capacity backlog from field to refinery.

WTI has been below coastal prices due to pipeline bottle necks. And late the price in West Texas (Midland) is even below the WTI price in Cushing, Oklahoma for the same reason.

But it is getting better. Some pipelines have been built and even reversed to get more oil out of Cushing, instead of bringing it in from the Coast.

[American Constitutionalist]

I meant shead, not ahead.
I hate these writing programs that change your words.

[thackney]

As I understand it, developing a new field takes several years at least.

While mostly true, much of the current US oil investment is filling out the existing field and testing the limits of the edges. Not as much additional infrastructure requirements for that.

Is there anybody out there who seriously believes oil prices will stay below much below $100 for long?

It is a bigger question for the tight oil plays that have very high flow rates early on, but quickly drop. If you enough of your total production before the prices climb up, you many never even break even on some wells.

[thackney]

How much will it help finanacially the smaller, weaker, companies that are hurting more from the lower oil prices with the these other larger or more finanacialy stable companies with these fire sale assets that they can buy at a discount ?

I don't see it helping the ones that are financially smaller and weaker. They will be the ones selling at a reduced price to pay off their oversized debt.

It will be those that are stronger with better cash positions that will mostly buy in at reduced prices.

In the long run, the wells don't get shut down, the names on the front gate change.

[Sherman Logan]

Thanks. I guess I should just stay out of criticizing the market decisions of experts. :)

Just seemed odd to me that this week’s price seems to be taken so seriously, as if it’s likely to last at this level for years.

Maybe it will, maybe it won’t. But I can’t see how this week’s price is any more indicative of the price for the third week of November in 2016 than the price in the third week of November in 2013 or for that matter 2008.

[thackney]

if it’s likely to last at this level for years.

Keep in mind, some say it might, and even a lot lower.

Oil may drop to $50 a barrel
http://finance.yahoo.com/news/oil-may-drop-to--50-a-barrel--211726433.html

But I can’t see how this week’s price is any more indicative of the price for the third week of November in 2016 than the price in the third week of November in 2013 or for that matter 2008.

Agreed. Predicting the price over a few years in nearly impossible. Too many things affecting the market. But if you need investors to fund your next dozen wells, it is hard to convince them while the price is still dropping.

[American Constitutionalist]

You got that right, no point of shutting down a well that already producing, profitable, and the money has already been sunk into.

[thackney]

I don’t think there is any talk of shutting down wells at today’s prices.

But some of the wells that would get drilled next year will be put on hold. While that happens, the flowing wells continue to slide lower on the production curve. If drilling slows down enough, the total US production rate will fall. It will certainly slow down the growth rate at $75 versus $100 over time.

[Sherman Logan]

it is hard to convince them while the price is still dropping.

True, no doubt. Not logical, of course, as by definition the time to invest in anything is when everybody else is selling. (This assumes it's a produce or commodity that will come back up sometime.)

But of course most investors are affected by the same psychological phenomena as everybody else, which is why they're all selling!

Most people are much happier to invest in a market going up, even when it's been going up quite a long time, when a logical person would realize that if, say, gold has gone up a lot, it's not as likely to go up a bunch more as something else that hasn't gone up or has even dropped in price.

[American Constitutionalist]

I don’t know if this is a good idea, but how about a exploration fee on a gallon of gas for example 5 cents ?
Anyway I hope there is a eureka moment very soon that or could drive down the cost for either e ploration, drilling,production, ...... I have to keep that in my prayers to God.
Would people be willing to pay a extra 5 cents for exploration, drilling to help keep America’s Shale industry booming ?

[thackney]

I don’t know if this is a good idea, but how about a exploration fee on a gallon of gas for example 5 cents ?

The cost for exploration of oil was in the price of selling the crude oil. Nothing else is required.

Would people be willing to pay a extra 5 cents for exploration, drilling to help keep America’s Shale industry booming ?

Are you envisioning a "tax" the government collects and then chooses who to distribute it too? Do I really need to explain why that is a bad idea?

[X-spurt]

Thanks for clarifying.

[American Constitutionalist]

OK, I got it now, it’s already in the price when they sell the oil.
Nope, I can don’t want to say the bad word, tax, or even advocate it.
Just thinking of ways to help the fracking industry.