Posted on 08/05/2015 10:52:37 AM PDT by thackney
Tuesday was a busy announcement day for the US independent E&Ps. After processing Pioneer Natural Resources' plans to ramp production on a $90-oil-price growth trajectory (see our take here), the operational updates released by Devon, Oasis and Cimarex sounded like an echo. Each of these three are also planning for production expansion in spite of oil price weakness.
Several times in the past couple months, we've noted the grit of the independents showing up in the one-off datapoint or the operations outlook. This week, we are hit with a flood of new evidence that the US independents are shirking their market-assigned "responsibility" of swing producer. Anyone counting on a US oil production response anytime soon should probably stop holding their breath now.
The independents are chomping at the bit, and even without the starting gun of oil prices firing, they are going to take off running. A false start will be punished later-oil prices can hardly withstand current production, much less growth. For now, though, the E&Ps' behavior seems to be diverging from the fact that oil prices are circling the drain, down 55% from a year ago and 20% from a month ago as bearish forces continue to compound unchecked. Self-help via cost reductions and efficiency gains has a lot to do with this as you'll see in our takeaways from the three companies' updates below
Sixteen Rigs In Sixteen For Cimarex
After producing more oil than expected during 2Q (and at lower costs), Cimarex increased its production guidance for the year to 12% growth from +6-9% before.
More importantly, the company outlined its 2016 plans, where it will increase its rig count by 9 rigs to 16 rigs running. In 2016, Cimarex will outspend cash flow by the amount remaining from its recent equity raise (somewhere around $600mm will be left).
This spending program hint and rig count outlook suggests Cimarex is banking on double digit oil production growth again in 2016.
Oasis Capex Down, Production Up
Oasis also produced more oil than expected during 2Q.
Oasis wells are performing better than they expected earlier this year, and operational efficiencies are taking effect. These factors led the company to guide 2015 capex down 5% while raising 2015 production expectations by 4%. Oasis is now planning on investing $670 million in CapEx during 2015 compared to its board approved budget of $705 million.
Wells completed with slickwater in Indian Hills are now costing approximately $7.8 million, which is 13% lower than where they were just a few months ago in May 2015. Another operator doing a lot more with a lot less.
Devon Prepares For Meaningful Delaware Drilling Acceleration
Another E&P, another 2Q beat vs. expectations. Devon's crude mix, realizations and cost management topped estimates during the quarter.
While less explicit about the future than some of the others, Devon's tone was unmistakably positive. The company expressed its intent to "meaningfully accelerate drilling activity in the Delaware Basin" when downspacing pilots finish and market conditions improve in 2016.
The company is delivering some extremely strong operational efficiencies that are enabling it to do more with less. Spud-to-release times are down as much as 17% in the company's main basins quarter-to-quarter. Total well costs are falling even as well productivity is coming out ahead of the type-curves.
Oil Service, Oil Major & Independent E&P Outlooks Diverge
In an interesting side-note, the subdued commentaries of oil service and driller management teams has faded into more optimistic commentaries from the E&Ps. Majors are more aligned with the service companies - trepidatious about the future.
It strikes us that in spite of the clear challenges in the US onshore market, the US independents seem to be coming out on top at this stage in the downturn. They are becoming even better at pushing barrels into the crowded marketplace. Their nimbleness is paying off in the short-term, and they are reaping massive efficiency and cost save gains at the expense of the oil service and drilling companies. As we've discussed in prior posts, this collective success appears unsustainable as it only exacerbates the supply problem.
Independent E&P commentary suggests the pricing concessions service companies are being forced to make will persist. It also suggests that the overcapacity in the service market will be protracted as the E&Ps are learning how to do more with less. Both of these points of course help explain the divergence in tone from E&P to oilfield service management teams.
The slower moving majors again find themselves eating dust kicked up by the fast moving independents. Their mega-projects are longer cycle and simply can't turn on a dime like the independents' short-cycle onshore plays.
Business publications, such as the Wall Street Journal, are infested with writers who don’t want cheap energy, thinking it’s bad for personified Mother Earth. This leads them to emphasize the economic consequences to high-cost producers and to ignore consumers.
Probably not the case at a Professional Network site for
the Oil and Gas Industry.
The last two paragraphs certainly align with my observation of the manufacturing sector supporting the service big-boys. They’re scrambling to adjust to the new reality, especially in their supply chain. One of the biggest issues will be the inflexibility on the price of special metals required for downhole environments. Not a lot of wiggle room...
Assuming the special metals people want to keep the business, I’m sure they are working to the reduce the cost of their product, too. Economics at work.
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