US independents brace for grim 2016

The European majors are taking further steps to reshape themselves for a world of lower-for-longer oil prices and protect shareholder dividends.

Leading US upstream independents are bracing for a tough 2016, as they report steeper cuts to their capital expenditure (capex), pull back drilling plans and lift assets sales to shore up their balance sheets.

A year of lower crude prices and expectations of values staying depressed for longer are making producers prepare for a fall in output next year. That is a marked change for medium to large independents, which have so far largely held on to their output targets. Firms appear to be reaching the limits of support that declining costs and improvements in efficiency have provided to weather the downturn.

Hess will cut 2016 capex to $2.9bn-3.1bn, down by as much as 29pc from the $4.1bn expected for this year. As a result, Hess now expects its 2016 output to drop to 330,000-350,000 b/d of oil equivalent (boe/d) from 370,000-375,000 boe/d projected for this year. Output in 2016 from the key Bakken acreage in North Dakota is expected to fall to about 95,000-105,000 boe/d with four rigs in operation. The firm's Bakken output rose by 31pc on the year in the third quarter to 113,000 boe/d with seven rigs in operation.

The largest US independent, ConocoPhillips, made a further cut to its 2015 capex, reducing it to $10.2bn from $11bn previously. Capex had initially been set at $16bn/yr until 2017. ConocoPhillips may reduce capex further in 2016 as major projects are completed, giving it the flexibility to cut by as much as $2bn, executive vice-president for exploration and production Matt Fox says. It may either shift part of that amount to shorter-cycle projects or "hold on those gains", he says. While ConocoPhillips' overall output will not fall as new projects come on stream, unconventional output will decline by about 3-5pc on the year without additional spending, Fox says. Its Eagle Ford acreage in Texas needs about 7-8 rigs to sustain output, but the company is only running six now. Similarly, its Bakken output needs about five rigs, while only four are in operation.

Anadarko Petroleum, which is still working out its 2016 budget, expects to lower its capex next year as it continues with its plan to keep spending within its cash inflows. It aims to keep output flat on the year.

US independents are stepping up asset sales to offset lower operating cash flow. Occidental Petroleum (Oxy) has exited the Bakken shale basin by selling its assets to an undisclosed buyer for $600mn to focus on its more profitable Permian acreage in Texas. "We just cannot see a situation where we would invest in [the Bakken], given what we have in the Permian," Oxy chief executive Steve Chazen says. The proceeds will allow the company to run four or five rigs in the Permian, where it has built a large inventory of future development locations that are economic at oil prices under $60/bl.

Anadarko will continue to "look for opportunities to sell assets where we think they are either non-core or the market sees the value in them greater than we do", chief executive Al Walker says. It has sold assets worth $2bn in the year to date. Leading Bakken producer Whiting, which took a $2.6bn write-down on the value of its assets in the third quarter, has sold assets worth $400mn so far this year.

Anadarko is also looking to snap up assets on the cheap amid the downturn, but it is being "pretty consistently outbid", Walker says. "And most often we are being outbid by private equity-backed management teams."

US producers are looking beyond the typically more expensive unconventional acreages to cut costs. Oxy is minimising activities in its non-core activities in the Middle East and north Africa (Mena), which include Bahrain, Iraq, Libya and Yemen. It took an after-tax, non-cash charge of $760mn from its operations in Iraq. The firm has been hoping to sell off assets in those regions since late 2013 to focus on its core Mena activities in Abu Dhabi, Oman and Qatar, but the security risk in Libya, Yemen and Iraq remains too high.

Anadarko plans to defer development drilling at its Tubular Bells and Llano fields in the Gulf of Mexico. It will delay further activity after current drilling programmes end at the South Arne field in Denmark's North Sea and in Equatorial Guinea. ConocoPhillips has taken a strategic decision to exit deepwater exploration by 2017, Fox says. And Hess expects continued low oil prices in 2016 and will "prioritise preserving the strength of our balance sheet", the company's president for exploration, Greg Hill, says.

Producers are also looking at driving down costs further. ConocoPhillips lowered its operating costs guidance for this year to $8.2bn from $8.9bn announced in the second quarter, which was a drop from a previous target of $9.2bn. Anadarko expects to reduce its per well cost by around $1.5mn-2mn from $7.5mn now. Oxy aims to reduce general and administrative expenses to $1.2bn in 2016 from $1.5bn. Hess has trimmed costs by about $600mn so far this year, "split evenly between capital expenditures and cash operating costs", it says.

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