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Oil budgets tighten

Many of the major players in the Permian Basin have yet to detail how they plan to scale back in 2015 in response to low oil prices, but announcements from a handful of companies offer a glimpse at how they intend to trim budgets.

They support the view of analysts that the roughly 50 percent drop in West Texas Intermediate crude prices since June will deter development of new fields but also that operators in the core areas could also suffer if prices remain as low as they are.

And on Thursday, prices plunged a couple more dollars with the Plains WTI posting reached $50.50.

The ongoing price slide follows forecasts of weakening demand combined with an oversupply of crude that the shale boom has contributed to, along with a November decision by the Organization of Petroleum Exporting Countries to cut prices instead of production in an attempt to defend market share from foreign producers including those in the United States.

“People can announce their capital budgets, but they are basing it on a certain oil price,” said Kirk Edwards, the Odessa oilman who is president of Latigo Petroleum, operating in the Panhandle. “A lot of these companies are developing their own strategies to cope with the pricing ahead, and everyone hopes it will be just for a short period of time. But the longer it goes and the more the price continues to fall, it just puts more pressure on these companies to stop spending money and see where this thing is going to bottom out.”

Houston-based Rosetta Resources, which also focuses on the Permian Basin, announced plans Wednesday to lower its capital spending budget for 2015 from $900 million to $700 or $800 million.

Fort Worth-based Approach Resources announced plans the same day to cut its 2015 budget to about $180 million, less than half of what was expected. But they hoped to do more with less, targeting output growth of up to 14 percent.

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Those company announcements followed others from larger companies including Continental and Apache to cut 2015 spending. Continental’s and Apache’s announcements involved plans to focus on better performing areas like the Permian Basin.

Apache officials announced plans Nov. 20 to spend more than $4 billion in capital next year. More than half would target the Permian Basin, with an eye on high-producing sweet spots.

“Frankly with what we are seeing on oil prices right now, it’s a hell of a lot easier if we had $100 oil and we were running,” CEO Steve Farris said during a Nov. 20 investor call, when oil prices were about $20 a barrel higher. “Because we are going to limit the number of rigs.”

Since then, word spread among local producers that Apache will release at least 10 rigs in the area. A company spokesperson declined to address that specifically. According to their November announcement, officials had planned to run up to 27 Permian Basin rigs in 2015, including parts of New Mexico.

Major Permian Basin producers that have delayed announcing capital announcements until early next year include Concho Resources and Pioneer Energy Resources.

In the $50-per-barrel range, many wells in the Permian Basin are no longer economical for companies to produce, said Ray Perryman of the Perryman Group, among others who put the number of wells rendered unattractive as at more than half.

“More important, the current price is below the level required to develop most of the [new] shale areas,” Perryman said in an email.

ConocoPhillips released a 2015 capital spending plan earlier in December that called for a 20 percent reduction to about $13.5 billion with plans to defer spending next year in the Permian Basin, which officials called “emerging.”

“We don’t need to ramp as quickly in the Permian as we previously thought, so we could take some scope there,” said Matt Fox, a Conoco executive vice president, in an October conference call.

Analysts including Ben Shattuck of Wood MacKenzie in Houston say such super major companies, which also include Exxon and Chevron, have the option of holding off on developing their Permian Basin assets in favor of others around the world.

Meanwhile, Canada-based Encana bucked the trend when company officials on Tuesday announced plans to ramp up activity in the Permian Basin, where the company gained a foothold in September with the announcement they would pay about $5.9 billion for Athlon Energy.

Those plans called for a spending program of up to $2.9 billion in 2015, about $300 million more than this year. That was based on a $70 oil price, but Encana officials reported supply costs as low as $35 per barrel in the Permian Basin that help the company endure low prices.

“How do you plan in such a volatile environment?” said CEO Doug Suttles, during a Tuesday conference call where he discussed an option of tightening focus on core areas such as the Permian Basin. ” … We’ll adjust our capital more as the year evolves.”


Contact Corey Paul on Twitter @OAcrude on Facebook at OA Corey Paul or call 432-333-7768.


This article was written by Corey Paul from Odessa American, Texas and was legally licensed through the NewsCred publisher network.

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