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Anadarko CEO: $50-55/bl will not drive growth

21 Jun 2016 18:50 (+01:00 GMT)
Anadarko CEO: $50-55/bl will not drive growth

Houston, 21 June (Argus) — Crude prices of around $50-$55/bl are still not strong enough to drive output growth in the US shale oil industry, Anadarko's chief executive Al Walker said.

"At $50-$55, we don't cycle cash quickly enough to create capital investment for growth," Walker said at the Wells Fargo West Coast Energy Conference. The industry needs "$60/bl or more, at services costs we have today, for the cash cycle to start."

The near doubling in crude prices from the lows of below $30/bl touched in the first quarter has reversed the continuous slide in US rig count and prompted a few low-cost producers like Pioneer and Devon to plan for a step up in drilling later this year.

But Walker's comments point to an industry that still requires higher prices to sustain growth despite improvements in technology and efficiency amid massive debts taken earlier on the back of a strong market.

Walker also cautioned that the recent improvement in prices have been driven by supply disruptions in countries such as Canada and Nigeria and as these outages end and supplies come back to the market, prices will again come under pressure. Stronger demand growth is needed to sustain the recovery in prices, he said.

Even as the industry continues to face pressure from the prolonged market downturn, producers have made significant improvements in efficiency and technology, allowing them to generate the same margins at $70/bl as they did at $100/bl before the downturn, Walker said.

Commenting on efficiency improvements, EOG's chief executive Bill Thomas, speaking at the same event, said that the company focused on "getting better" and "to emerge from the downturn where we can be very profitable," he said. "We have done that, we are in fantastic shape." The independent is focusing on drilling at its premium locations, which currently give a 30pc rate of return at $40/bl. The independent generates additional cash flow of $80mn with $1/bl increase in crude prices.

The prolonged downturn is also making it easier for better off producers to acquire acreage as smaller producers "are literally out of money," allowing companies such as EOG buy properties adjacent to the existing key assets, Thomas said. Such acquisitions allow EOG and others to drill longer lateral wells to lower costs and improve efficiency.

Last week, Devon said it agreed to sell its remaining non-core assets in Texas' Midland basin for $858mn, with Pioneer buying about 28,000 acres from Devon for about $435mn. The deals closely follow Antero Resources' purchase of 55,000 acres in the US northeast Marcellus shale for $450mn.