Analysis: US independents cut more capex

US upstream independents are preparing for steeper capital expenditure (capex) cuts next year, as they struggle to balance budgets with sharply reduced cash flows in a lower-for-longer oil price environment.

Continental Resources, Apache and Marathon Oil have raised their production guidance for 2015 on increases in efficiency and cost savings, as services providers lower rates for rigs and chemicals. But these gains are diminishing, and companies face declining output as they cope with a $50/bl crude price.

Key Bakken producer Continental's production may have already started to decline. Its third-quarter output in the Bakken formation fell by 4pc from April-June to below 136,000 b/d of oil equivalent (boe/d). The firm, which raised its guidance for 2015 production growth to 24-26pc from 19-23pc, expects output to fall to 210,000 boe/d by the end of this year from 228,000 boe/d in the third quarter.

Continental aims to achieve neutral cash flow at a $50/bl Nymex WTI crude price. The company in the second quarter said it could achieve neutral cash flow at a price of $60/bl. It has the option to pare capex to as low as $1.5bn-1.6bn in 2016 from $2.7bn this year, while maintaining production at 200,000 boe/d. "If low commodity prices persist in 2016, we have additional Bakken rigs coming off contract, so we can further reduce capex," chief financial officer John Hart says.

Chesapeake Energy is preparing for a "significantly lower capital programme in 2016", as it continues to "focus on capital and operating cost efficiency", chief executive Doug Lawler says. Marathon will cut 2016 capex by 29pc to $2.2bn from this year and keep output "flat to the 2015 exit rate", chief executive Lee Tillman says.

Marathon has cut its quarterly dividend payout to 5¢/share from 21¢/share, which will boost annual free cash flow by more than $425mn. The firm expects its fourth-quarter North American output to fall to 244,000-257,000 boe/d on reduced completion work in the Bakken and asset sales, down from 263,000 boe/d in July-September.

Apache, which has not given any guidance for 2016, says its primary target is to pay for capex and dividends from operating cash flow. The firm's North American operations have a decline rate of just over 20pc/yr, but it is betting on efficiency improvements to drive growth, chief executive John Christmann says. Spending on development of Apache's key Permian acreage in Texas will depend on oil prices, he says.

But the firm's conventional operations outside the US give it an edge over its peers in weathering the downturn. "Recent exploration successes in the North Sea and Egypt demonstrate the quality of our international assets and underpin their potential to sustain free cash flows for an extended period of time," Christmann says.

Falling crude prices are forcing many independents to step up asset impairments. Apache took a third-quarter impairment of $3.7bn, raising its total for this year so far to $12bn. Chesapeake wrote down $5bn in the third quarter.

Pioneer Natural Resources is an outlier in the industry, adding rigs when almost every producer has made significant cuts, notably in its top Spraberry-Wolfcamp acreage in the Permian basin. But the firm says it can meet its output growth target of 15pc/yr in 2016-18 using fewer rigs than previously anticipated, as a result of improved capital efficiency and well productivity. Pioneer has kept its capex budget for 2015 unchanged at $2.2bn.

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