Large US independents make bold bets on shale

Large diversified US independents have made bold revisions to their 2018 capital expenditure (capex) to increase shale spending, betting that they can overcome the challenges facing the sector.

Occidental Petroleum has made one of the biggest increases among its peer group, up by nearly 30pc from an earlier plan to $5bn. The jump comes as the company expects $5bn of additional cash flow this year, of which nearly half is from higher crude prices and the remainder from the sale of a Texas coast export terminal and Permian basin pipeline systems for a combined $2.6bn.

"Occidental is generating far greater cash flow than we had anticipated," chief executive Vicki Hollub says. The increase was also partly because it started the year with a smaller budget while it was in the middle of resetting operations by lowering costs and focusing on core acreage. The plan was to break even — or fund its dividend and capex to sustain output — at a WTI price of $40/bl, which it achieved in the second quarter. "We started the year a little under capital but at a pace that maximised returns," Hollub says.

Apache raised its plan to $3.4bn from $3bn, with the entire increase earmarked for the Permian, which lies in west Texas and New Mexico. US capex will rise to $2.7bn from $2.3bn, while international spending will be flat at $700mn. Anadarko increased its plan to $4.5bn-4.8bn from its earlier forecast of $4.2bn-4.6bn. Of that, $450mn will go on the Denver-Julesburg basin in Colorado and the Delaware in Texas, where it needs to spend more to drill longer wells and meet higher service costs. It expects midstream expenses to rise by $100mn. But these will be partly offset by a capex decline of $300mn in the deepwater Gulf of Mexico, in exploration and in Mozambique.

The independents are unfazed by the pipeline constraints and labour shortages affecting operations in the Permian, the main intended recipient of the bulk of their spending increases. They have firm agreements to ship out the bulk of their output, and they continue to invest in the midstream to meet future demand. "While others are playing defence, we will be playing offence," Hollub says.

Anadarko will pare back work in the Denver-Julesberg basin by removing a completion crew from the three it runs in the area. This will reduce the number of wells it completes there, and cut year-on-year output growth to 20pc from 30pc planned earlier. But the loss would be offset by the Delaware, where output rose by 88pc in the second quarter from a year earlier to 62,000 b/d of oil equivalent (boe/d), as it started up pad drilling facilities. It is deploying a new completion design that fractures wells in closer spaces and uses sand and water more efficiently, which is expected to bring down costs to $8mn/well from $10mn/well now.Anadarko's output in the second quarter rose to nearly 640,000 boe/d, up by 1pc from a year earlier, but crude now comprises 57pc of the total, compared with 52pc a year earlier, with liquids up to 73pc from 67pc, thanks largely to the Delaware. "The results in the Delaware basin are the engine driving much of our recent success and we are just getting started as we pace our midstream takeaway with our upstream development," chief executive Al Walker says.

Apache, which is developing an area adjacent to the Delaware called the Alpine High, has contracts to move half of its oil output from the Permian this year and next. Another 30pc, of west Texas sour crude, goes to local refiners. It will continue to look at how to move out the other 20pc. "Relief will start showing up next year," chief executive John Christmann says. "Until then we will take steps to make sure our products flow to markets. It will not result in any production shut-ins."