The new normal?

Author Manash Goswami

Nymex WTI crude futures have only settled above $50/bl for four days this year. That’s been enough to spur a few US independents to announce mergers, increase capital outlay and step up drilling activities.

Nymex WTI crude futures have only settled above $50/bl for four days this year. That’s been enough to spur a few US independents to announce mergers, increase capital outlay and step up drilling activities.

Crude futures have nearly doubled from the lows below $30/bl seen in the first quarter. Decisions by a handful of producers like Marathon Oil and Pioneer Natural Resources to loosen the purse strings points to the resilience of the US unconventional industry and shows how far the sector has come in terms of lowering costs and improving efficiency. 

Marathon Oil acquired a private Oklahoma shale oil producer PayRock Energy for $888mn, gaining ownership of 61,000 net acres in the Anadarko basin of the Stack formation. With completed well costs of about $4mn-$4.5mn, PayRock offers a 60-80pc before-tax internal rate of return at $50/bl WTI.

The deal came close on the heels of Devon selling its remaining non-core assets in the Midland basin of Texas for $858mn, part of which was acquired by Pioneer Natural Resources for about $435mn. Last month, Range Resources agreed to buy Memorial Resource for $3.3bn.

In addition to the deals, both Pioneer and Devon are adding rigs and increasing their capex. Pioneer plans to increase its horizontal rig count by five to 17 in the northern Spraberry/Wolfcamp area of the Permian, with the first addition in September. As a result, 2016 capex will increase by about $100mn to $2.1bn. Devon raised its 2016 capex guidance by $200mn to $1.1bn-$1.3bn, as it adds three rigs in the third quarter.

Improvements in technology, a fall in services costs and higher efficiency are all enabling producers to become economical at lower prices. US major Chevron, which has lowered the cost of horizontal drilling by 40pc and cut number of drilling days per well by 50pc in the past year in the Midland basin, has 1,300 wells that offer a 10pc rate of return at $40/bl WTI, and that total rises to 4,000 at $50/bl. ExxonMobil is drilling longer lateral wells and, with improved completion designs, has lowered development costs to less than $10/bl in the Wolfcamp area and sub-$11/bl in the Bakken.

Yet, the US shale industry as a whole still needs higher oil prices to drive output growth.

"At $50-$55, we don't cycle cash quickly enough to create capital investment for growth," Anadarko’s chief executive Al Walker said. The industry needs "$60/bl or more, at services costs we have today, for the cash cycle to start," Walker said.

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