Analysis: US indies' quandary: to pump or not

US independent oil and gas producers are in a quandary: Each new barrel they pump brings cash to repay debt and fund drilling, but also adds to the growing domestic supply glut.

Almost all US unconventional oil producers such as Occidental, Hess and Anadarko who have reported their second-quarter earnings have raised their output guidance for this year. Better-than-expected fall in costs of services and improvements in efficiency have allowed them to spend less to produce more.

"We have seen obviously much stronger production coming out of the US and with the ingenuity and cost efficiencies of the US industry we have seen costs continue to fall and economics of those barrels continue to rise," Chevron's chief financial officer Patt Yarrington said. "And so that puts more supply onto the market."

The US major took a non-cash impairment of $1.96bn and $670mn in charges for lowering its long-term price outlook, to an undisclosed number, in part because of oversupply.

But this resilience is being cited by major banks such as Goldman Sachs as one of the factors that may prolong the downturn after prices took a double dip this month. Benchmark US WTI futures are down by half from year ago levels at around $45/bl. Prices had recovered in the second quarter, but those gains have been wiped out on the prospect of more supplies from Iran, resilient US output and weak demand.

Anadarko seems to best illustrate the cost savings. The independent can now drill a horizontal well at its Wattenberg acreage in Colorado for about $1mn, 70pc less than the $3.4mn cost it gave in the first quarter.

"It's not just price reductions from various service vendors that in a different hydrocarbon price environment would come back to us as a higher price," chief executive Al Walker said on an earnings call. "These are sustainable improvements."

Rig efficiency has doubled over the last year, with the company "drilling the same number of wells with half the rigs," Walker said. It is drilling more wells "with no belief that we are going to increase out capital plans beyond initial guidance through the balance of the year." Anadarko set its 2015 capex guidance at $5.4bn-$5.8bn at the start of the year. The company is targeting US oil output of 221,000-225,000 b/d for the year compared with a guidance given at its first-quarter earnings statement in May of 207,000-211,000 b/d.

Hess raised its 2015 output guidance to 360,000-370,000 b/d of oil equivalent (boe/d), largely driven by the Bakken in North Dakota where it is forecasting production of 105,000-110,000 boe/d, up from an earlier target of 95,000-105,000 boe/d, chief executive John Hess said.

Hess plans to leverage its "lean manufacturing" techniques from the Bakken to its joint venture acreage with Consol in the Utica shale. Hess raised Utica's guidance by 5,000 boe/d to 25,000-30,000 boe/d. The higher output comes as it plans to drill 187 wells, complete 217 and bring 225 online this year against the 261 drilled, 230 completed and 238 brought online last year.

Occidental raised the lower end of its full-year guidance. Oxy's new target is 660,000-670,000 b/d of oil equivalent (boe/d). In the first quarter, the company had raised the forecast by 60,000-80,000 boe/d over last year's rate of 591,000 boe/d.

Yet, the debt-laden sector's goal of covering capex and dividends from operating cash flows remain elusive.

The world's biggest independent oil and gas producer ConocoPhillips made a further cut to its 2015 capex, to $11bn from the plan of $11.5bn a year through 2017 announced in March, which was a reduction of 30pc from the annual $16bn expected earlier through the same years. It has the financial flexibility to take capex down to $8bn, which will keep its output flat, to achieve its target to become cash flow neutral by 2017.

"Rest assured ConocoPhillips is laser focused on the things we can control," chief executive Ryan Lance said. The company will operate on "our priorities of a growing dividend, a strong balance sheet and growth we can afford."

Similarly, Hess may cut it capex further in 2016. "We remain committed to managing our business to be cash-generative over the long term," John Hess said. "So first, we've reduced our capital spend from $5.6bn in 2014 to $4.4bn in 2015 and we will further reduce capital in 2016."

Whiting Petroleum has announced the steepest cut so far. For 2016 "we expect capex and discretionary cash flow to be approximately equal at $1bn," chief executive James Volker said. The reduced capex next year will mean output flattening out and averaging 147,000 b/d of oil equivalent (boe/d). The cash flow target is based on $50/bl oil and $3/mmBtu natural gas. It lowered its 2015 capex to $2.15bn from an earlier plan of $2.3bn.

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