Revisisting our "What low oil prices" thesis with two large independents as written by Joseph Triepke at Oilpro.
A month ago, we reacted to a DJ Basin operator's bullish guidance with the observation that the US independents may make a terrible swing producer. In short, the notion we introduced was that the grittiness of US independents, continued oilfield cost reductions, and improving efficiency could lead to unexpected production growth from unconventional oil plays even in this new low-oil price environment.
In the first half of 2015, the market banked on the US becoming the "swing producer." If that doesn't happen by 2016, oil prices have significant further downside risk and the ensuing recovery will be significantly prolonged.
Hess & Anadarko Show Off Incredible Efficiency Gains; Plan For Growth
On Wednesday, we heard commentary from both Anadarko and Hess that suggests our thesis is becoming reality. Both operators recorded strong crude oil production during the second quarter. More importantly, each company talked up future production expectations, without any increases to capital expenditure budgets - a sign they are squeezing their contractors harder than ever.
Anadarko delivered more than 18,000 barrels per day of higher-margin oil sales volumes above their guidance. And CEO Al Walker had this to say about the future: "Our efficiencies and savings will enable us to drill more than 100 additional wells this year with our current capital expectations and with no belief that we're going to increase our capital plans beyond initial guidance through the balance of the year." Anadarko plans to grow its oil production 13% this year in spite of low oil prices.
For their part, Hess also beat their production guidance while posting 23% production growth y/y for the second quarter. Meanwhile, they are drilling more wells than expected with their same $4.4 billion capex budget, while raising their 2015 production guidance about 3%.
In a nutshell, here's what we learned about US onshore oil: production is up, efficiencies are way up, and capex is flat to down.
What Does This Mean?
The independents aren't going quietly into the night. They aren't giving up because the trend is not their friend. Capitulation isn't in their vocabulary. Instead they are becoming even more competitive, becoming even better at pushing barrels into the crowded marketplace.
This is only good news for the individual high quality companies (like Hess and Anadarko) that can pull it off. And it's only good news in the short-term, as these names will be victims of their own success in the medium-term. It is bad news for the upstream industry generally, and very bad news for service providers and drillers.
This suggests the pricing concessions service companies are being forced to make will persist. It also suggests that the overcapacity in the service market will persist as E&Ps are learning how to do more with less.
It confirms a lower for longer oil price scenario and gives us increasing confidence in our recent call that a "V" will not be. We think more operators will echo Hess and Anadarko, and US oil production is going to hold up a lot better than folks thought just 3 months ago. Even WTI prices recently double-dipping back into the $45-$50 range doesn't seem to be derailing the independents' outlook.
We acknowledge that both companies are outspending their operating cash flow, which will catch up as capital availability fades in a sustained low-price environment. However, it increasingly seems that the only thing that can turn US production around in the medium term is another big leg down in WTI oil prices from here, which would cause more producers tap out and deliver the US production response the oil market needs to heal.
Either WTI falls again, or Saudi blinks and cuts production. The game of chicken is getting serious.
http://oilpro.com/post/17043/revisiting-our-low-oil-prices-thesis
