2015 Capital Expenditures
Revised 2015 CAPEX For Bakken Operators
Matthew Hatfield Wind River Oil Services
UPDATED January 13, 2015
HIGHLIGHTS •
Oil could continue to slide and bottom out in the $35-$40 range during 1Q2015.
•
Breakeven points are as low as $30/bbl to drill and $15/bbl to keep well going.
•
Rig count will continue to drop, but drillers will be more efficient.
•
Operators will cut vertical drilling operation in Texas before horizontal operations.
•
CAPEX will be cut 15-35 percent, depending on company.
•
Most operators will focus on core areas.
•
Most operators expect year to year production increase. THE BAKKEN IN GENERAL. Many analysts are predicting a slow first quarter 2015, with decreasing CAPEX
compared to 2014. Capital One Securities said in a statement “We think cuts of 25 percent or more versus a year ago are on the way and won’t be unusual.” 1 In addition, rig counts are predicted to drop. Raymond James is predicting an overall drop in rigs by 587, or a 30 percent drop. 2 Many exploration companies are still predicting production growth, though modest compared to 2014. Producers are focusing more on core acreage and proven fields and spending less on acquiring acreage. Several producers have also stated that they may delay some completions until after the winter months.
1 2
(Wade 2014) (Krauss 2014)
Uncertainty is playing a role in prediction as well. Whiting Petroleum Corp is delaying their release 2015 capital spending plan until February, citing volatile oil prices. Chevron Corp and Exxon Mobile Corp are delaying their 2015 CAPEX plans until spring. As long as crude oil prices continue to slide, expect revisions to 2015 CAPEX. Most of these capital spending plans are based on a year-end crude price of $65-75/bbl. CRUDE PRICES AND THE RELATION TO PRODUCTION Crude prices may continue to slide and bottom out during 1Q2015 at between $35$40/bbl. It is unlikely that the Saudi Arabia will decrease their production until oil prices reach $40. However, break even points in U.S. shale fields are much lower than most expected. According to a report from the North Dakota Department of Mineral Resources dated January 8, 2015, the breakeven point to drill a new well in McKenzie County in $30/bbl and $36/bbl in Williams County. Error! Reference source not found. Notably, the report claims that the price at which existing wells would be shut in is as low as $15/bbl.
Figure 1. Source: North Dakota Department of Mineral Resources
In the same report, regulators predict that state wide production of oil would remain at roughly 1.2 million bpd if crude prices are $55/bbl. If crude prices are at $45bbls state wide production will fall to 975,000 bpd. (see figure 2) Also, rig counts could be deceiving as well. It is true that rig counts have fallen over the last month by 54 rigs. However, 38 of those rigs, or about 70 percent, came Figure 2. Source: ibid
from vertical drilling operations in
the Permian Basin. Horizontal rigs (virtually all of the rigs in the Bakken) have declined, but they are still at the same level as when WTI was $90/bbl in the summer of 2014. Drilling operators have more option on a horizontal well, because they can drill longer laterals to increase production of the well. 3 SELECTED 2015 CAPEX OF BAKKEN OPERATORS Marathon Oil Corp Marathon Oil’s capital expendetures are expected to be in the $4.3-4.5 billion range for 2015. Those numbers represent a 20 percent decrease from 2014. The company expects to spend less money on exploration, while still seeking “high return investment opportunities” in the US “We remain confident in our investment opportunities in the three US resource plays,” said LEE M. Tillman, Marathon Oil president and chief executive officer. “Our 2015 capital 3
(Collins 2015)
program is not opportunity constrained but will reflect sound discipline in managing cash flows in the current price environment.” 4 The company expects to adjust capital spending depending on market conditions, and notes that final 2015 budget is not yet finalized. Even with 2015 CAPEX cut by 20 percent, Marathon still expects a total annual production rate to be in the high single digits. Continental Resources Continental Resources is planning a 2015 capital expenditure budget of $2.7 billion, representing a $600 million cut from last year. However, even with the cuts Continental is projecting a 16 to 20 percent production growth in 2015. Harold G Hamm, chairman and chief executive officer said, “This revised budget prudently aligns our capital expenditures to lower commodity prices, targeting cash flow neutrality by mid-year 2015. This budget also maintains our financial flexibility and strong balance sheet while continuing to grow our core Bakken and SCOOP plays. The depth and quality of our asset base coupled with our financial strength allows us to be adaptable in a variety of price environments.” 5 The company is planning a rig count reduction from 50 to 34 by the end of 1Q 2015, allocating 11 rigs to the Bakken play.
4 5
(OGJ Editors 2014) (Continental Resources 2014)
Continental plans to complete 188 net wells in the Bakken during 2015. The focus will be on core acreage, lowing acquisition cost. As we have seen, Continental will continue its policy of drilling multiple holes on a single pad, maximizing their acreage in proven areas. Oasis Petroleum Inc. Oasis Petroleum has a total CAPEX in the range of $750-$850 million in 2015, down form a 2014 CAPEX of $1.425 billion in 2014. Year over year production growth is expected to be 5 to 10 percent in 2015, down from 35 percent in 2014. Like Continental, Oasis is focusing its resources on its core area, Indian Hills. They also plan to delay some completions till after winter months. Thomas B. Nusz, Oasis’ chairman and chief executive officer commented, “We plan to focus our development program in Indian Hills during 2015 to capitalize on both existing infrastructure and the success that we have delivered with high intensity completions in the area.” Regarding rig counts, Nusz added, “We have scheduled our program to have ten rigs running by the end of January 2015 and six running by the end of March 2015. We plan on delaying a number of completions during winter months to later in the year.” 6 Exxon Mobile (XTO) Exxon Mobile has yet to release their 2015 CAPEX, however in March of 2014 Exxon announced a planned 6 percent reduction on capital expenditures between 2015-2017. At the same time, Exxon is projecting a 35 percent increase in world demand of crude oil by 2040. 7
6 7
(Oasis Petroleum Inc. 2014) (ExxonMobile 2015)
With this in mind, it is possible that Exxon is positioning them for longer term, while bracing for lower oil prices in the short term. Emerald Oil Emerald Oil Inc. operates in the Richland area of Montana and McKenzie County, North Dakota. Emerald is cutting their capital expenditures from $210-240 million in 2014 to $68-81 million in 2015, representing a cut in production from 5,425-5,800 boe/day in 2014 to 4200-4500 boe/day. 8 These cuts are perhaps the most dramatic of any operator in the Bakken. Halcon Resources Halcon is planning steep capital expenditure cuts in 2015. The cuts will be down to $750 million from $950 million. They also plan on reducing their rig count from 11 to six. Chief executive officer Floyd Wilson said “We will not employ five rigs that we had prior plans to employ next year. We will run six rigs to get started here and see how the year unfolds…We will remain flexible to increase that capital program for 2015.” Even with steep cuts, Halcon believes they can increase year to year production 15-20 percent, by increasing efficiency, cutting non-essential cost and focusing on their core areas of operation, notably, the Fort Berthold area. 9 Linn Energy LLC Linn Energy LLC is a smaller producer in the Bakken and operate mostly in Montrail County and McKenzie County. They are reported to have debt levels in excess of $10 billion. However, they announced on January 12, 2015 that they are positioning themselves to buy oil 8 9
(Emerald Oil, Inc 2014) (Carolyn Davis 2014)
and gas assets in 2015. Linn CEO said “part of our strategic vision in a challenging commodity price environment is to position ourselves to be a buyer in a very opportune point in the commodity cycle.” 10 WPX Energy Little has been reported about WPX’s 2015 CAPEX, but recent developments seem to place the company on solid financial footing for 2015. WPX is raising capital by selling some of their assets. They are receiving $294 million for the sale of their interest on Apco Oil and Gas. They are also selling their operations in the Marcellus Shale to Southwestern Energy for $300 million. WPX is focusing its operations in 3 core areas, down from 5 last year. Most of their oil operations will be focused in the Williston Basin, particularly on Indian reservation land. Statoil There is little information about 2015 CAPEX. However, industry insiders are not looking favorably regarding Statoil in 2015. Statoil took major gambles in the last few years committing huge resources to new discoveries in Angola, The Norwegian Arctic and the U.S. Gulf of Mexico. All of them have failed. 11 With less cash on hand, and higher dividend to be paid out, it is expected by many that Statoil will cut its exploration budget. Analysts estimate that Statoil needs oil to rise back to $110/bbls to finance investments and dividends from its cash flow. 12 Statoil says it has handed
10
(Lynn Energy LLC 2015) (Reuters 2014) 12 (Reuters 2014) 11
back three of its four Greenland offshore oil and gas exploration licenses, as the play is considered too risky and too costly amid falling oil prices Burlington Resources (ConocoPhillips) ConocoPhillips has announced that they are cutting their capital investments by 20 percent. “We are setting our 2015 capital budget at a level that we believe is prudent given the current environment,“ said Ryan Lance, ConocoPhillips’s chairman and chief executive. 13 Even with the cuts, the company is projecting a 3 percent production growth in part because of increasingly productive wells in North Dakota. Whiting Petroleum Corp. Citing volatile commodity prices, Whiting Petroleum Corp is not releasing its 2015 capital expenditures budget till early 2015. Triangle Petroleum Corp. Triangle Petroleum Corp. has not released any information regarding 2015 capital expenditures. They are expected to release 2015 CAPEX in early 2015. Slawson Exploration Slawson Exploration is a privately held company and has no obligation to share financial information.
13
(Krauss 2014)
CONCLUSION Considering current commodity prices, all producers will be lowering their capital expenditures in 2015. Producers with sound balance sheets will decrease exploration in unproven areas and focus development in their core areas of operation. By doing so, production will still increase, but increases will be modest compared to 2014. As such, rig counts will decrease. However, “rig count” numbers are becoming a less important when comparing them over time. As drillers are becoming more efficient and producers are drilling multiple wells on a single pad, fewer rigs are needed. Also, vertical rigs in Texas are being pulled first, because drilling operators can be more efficient with horizontal rigs. Breakeven point in the Bakken is much lower than previously thought, as low as $29/bbl to drill a new well. Also, regulators are claiming that producers will not shut in a well until crude is at $15/bbl Many analysts are predicting that some smaller companies with little cash will be acquired by larger stable companies, so be on the lookout for mergers and acquisitions this year.
WORKS CITED Carolyn Davis. NGI Shale's Daily. November 12, 2014. www.naturalgasintel.com. Collins, Gabe. Seeking Alpha. January 12, 2015. www.sekkingalpha.com. Continental Resources. Continental Revises 2015 CAPEX Budget. Press Release, Houston: Continental Resources, 2014. Emerald Oil, Inc. Emerald Oil Announces Senior Management Change; Updates 2015 Guidance and CAPEX Plans. Press Release, Denver, CO: Emerald Oil, Inc, 2014. ExxonMobile. ExxonMobil’s Outlook for Energy Sees Global Increase in Future Demand. Press Release, Irving, TX: ExxonMobile, 2015. Helms, Lynn D. North Dakota Department of Mineral Resources. House Appropraition Committee Report, Bismark, ND: North Dakota Department of Mineral Resources, 2015. Krauss, Clifford. "Oil Falls to a 5 Year Low, and Energy Companies Start to Retrench." The New York Times, December 8, 2014. Linn Energy LLC. Linn Energy LLC is Getting Ready to go on a Shopping Spree. Press Release, Houston, TX: Linn Energy LLC, 2015. Oasis Petroleum Inc. Oasis Petroleum Inc. Announces Preliminary Ranges for 2015 and Provides an Operations Update. Press Release, Houston: Oasis Petroleum Inc., 2014. OGJ Editors. Oil & Gas Journal. December 18, 2014. www.ogj.com. Reuters. Statoil Could Pay High Costs for Response to Exploration Failure. Oslo, November 30, 2014. Wade, Terry. Rig Zone. December 22, 2014. www.rigzone.com (accessed 2014).
Matthew Hatfield Wind River Oil Services
UPDATED January 13, 2015
HIGHLIGHTS •
Oil could continue to slide and bottom out in the $35-$40 range during 1Q2015.
•
Breakeven points are as low as $30/bbl to drill and $15/bbl to keep well going.
•
Rig count will continue to drop, but drillers will be more efficient.
•
Operators will cut vertical drilling operation in Texas before horizontal operations.
•
CAPEX will be cut 15-35 percent, depending on company.
•
Most operators will focus on core areas.
•
Most operators expect year to year production increase. THE BAKKEN IN GENERAL. Many analysts are predicting a slow first quarter 2015, with decreasing CAPEX
compared to 2014. Capital One Securities said in a statement “We think cuts of 25 percent or more versus a year ago are on the way and won’t be unusual.” 1 In addition, rig counts are predicted to drop. Raymond James is predicting an overall drop in rigs by 587, or a 30 percent drop. 2 Many exploration companies are still predicting production growth, though modest compared to 2014. Producers are focusing more on core acreage and proven fields and spending less on acquiring acreage. Several producers have also stated that they may delay some completions until after the winter months.
1 2
(Wade 2014) (Krauss 2014)
Uncertainty is playing a role in prediction as well. Whiting Petroleum Corp is delaying their release 2015 capital spending plan until February, citing volatile oil prices. Chevron Corp and Exxon Mobile Corp are delaying their 2015 CAPEX plans until spring. As long as crude oil prices continue to slide, expect revisions to 2015 CAPEX. Most of these capital spending plans are based on a year-end crude price of $65-75/bbl. CRUDE PRICES AND THE RELATION TO PRODUCTION Crude prices may continue to slide and bottom out during 1Q2015 at between $35$40/bbl. It is unlikely that the Saudi Arabia will decrease their production until oil prices reach $40. However, break even points in U.S. shale fields are much lower than most expected. According to a report from the North Dakota Department of Mineral Resources dated January 8, 2015, the breakeven point to drill a new well in McKenzie County in $30/bbl and $36/bbl in Williams County. Error! Reference source not found. Notably, the report claims that the price at which existing wells would be shut in is as low as $15/bbl.
Figure 1. Source: North Dakota Department of Mineral Resources
In the same report, regulators predict that state wide production of oil would remain at roughly 1.2 million bpd if crude prices are $55/bbl. If crude prices are at $45bbls state wide production will fall to 975,000 bpd. (see figure 2) Also, rig counts could be deceiving as well. It is true that rig counts have fallen over the last month by 54 rigs. However, 38 of those rigs, or about 70 percent, came Figure 2. Source: ibid
from vertical drilling operations in
the Permian Basin. Horizontal rigs (virtually all of the rigs in the Bakken) have declined, but they are still at the same level as when WTI was $90/bbl in the summer of 2014. Drilling operators have more option on a horizontal well, because they can drill longer laterals to increase production of the well. 3 SELECTED 2015 CAPEX OF BAKKEN OPERATORS Marathon Oil Corp Marathon Oil’s capital expendetures are expected to be in the $4.3-4.5 billion range for 2015. Those numbers represent a 20 percent decrease from 2014. The company expects to spend less money on exploration, while still seeking “high return investment opportunities” in the US “We remain confident in our investment opportunities in the three US resource plays,” said LEE M. Tillman, Marathon Oil president and chief executive officer. “Our 2015 capital 3
(Collins 2015)
program is not opportunity constrained but will reflect sound discipline in managing cash flows in the current price environment.” 4 The company expects to adjust capital spending depending on market conditions, and notes that final 2015 budget is not yet finalized. Even with 2015 CAPEX cut by 20 percent, Marathon still expects a total annual production rate to be in the high single digits. Continental Resources Continental Resources is planning a 2015 capital expenditure budget of $2.7 billion, representing a $600 million cut from last year. However, even with the cuts Continental is projecting a 16 to 20 percent production growth in 2015. Harold G Hamm, chairman and chief executive officer said, “This revised budget prudently aligns our capital expenditures to lower commodity prices, targeting cash flow neutrality by mid-year 2015. This budget also maintains our financial flexibility and strong balance sheet while continuing to grow our core Bakken and SCOOP plays. The depth and quality of our asset base coupled with our financial strength allows us to be adaptable in a variety of price environments.” 5 The company is planning a rig count reduction from 50 to 34 by the end of 1Q 2015, allocating 11 rigs to the Bakken play.
4 5
(OGJ Editors 2014) (Continental Resources 2014)
Continental plans to complete 188 net wells in the Bakken during 2015. The focus will be on core acreage, lowing acquisition cost. As we have seen, Continental will continue its policy of drilling multiple holes on a single pad, maximizing their acreage in proven areas. Oasis Petroleum Inc. Oasis Petroleum has a total CAPEX in the range of $750-$850 million in 2015, down form a 2014 CAPEX of $1.425 billion in 2014. Year over year production growth is expected to be 5 to 10 percent in 2015, down from 35 percent in 2014. Like Continental, Oasis is focusing its resources on its core area, Indian Hills. They also plan to delay some completions till after winter months. Thomas B. Nusz, Oasis’ chairman and chief executive officer commented, “We plan to focus our development program in Indian Hills during 2015 to capitalize on both existing infrastructure and the success that we have delivered with high intensity completions in the area.” Regarding rig counts, Nusz added, “We have scheduled our program to have ten rigs running by the end of January 2015 and six running by the end of March 2015. We plan on delaying a number of completions during winter months to later in the year.” 6 Exxon Mobile (XTO) Exxon Mobile has yet to release their 2015 CAPEX, however in March of 2014 Exxon announced a planned 6 percent reduction on capital expenditures between 2015-2017. At the same time, Exxon is projecting a 35 percent increase in world demand of crude oil by 2040. 7
6 7
(Oasis Petroleum Inc. 2014) (ExxonMobile 2015)
With this in mind, it is possible that Exxon is positioning them for longer term, while bracing for lower oil prices in the short term. Emerald Oil Emerald Oil Inc. operates in the Richland area of Montana and McKenzie County, North Dakota. Emerald is cutting their capital expenditures from $210-240 million in 2014 to $68-81 million in 2015, representing a cut in production from 5,425-5,800 boe/day in 2014 to 4200-4500 boe/day. 8 These cuts are perhaps the most dramatic of any operator in the Bakken. Halcon Resources Halcon is planning steep capital expenditure cuts in 2015. The cuts will be down to $750 million from $950 million. They also plan on reducing their rig count from 11 to six. Chief executive officer Floyd Wilson said “We will not employ five rigs that we had prior plans to employ next year. We will run six rigs to get started here and see how the year unfolds…We will remain flexible to increase that capital program for 2015.” Even with steep cuts, Halcon believes they can increase year to year production 15-20 percent, by increasing efficiency, cutting non-essential cost and focusing on their core areas of operation, notably, the Fort Berthold area. 9 Linn Energy LLC Linn Energy LLC is a smaller producer in the Bakken and operate mostly in Montrail County and McKenzie County. They are reported to have debt levels in excess of $10 billion. However, they announced on January 12, 2015 that they are positioning themselves to buy oil 8 9
(Emerald Oil, Inc 2014) (Carolyn Davis 2014)
and gas assets in 2015. Linn CEO said “part of our strategic vision in a challenging commodity price environment is to position ourselves to be a buyer in a very opportune point in the commodity cycle.” 10 WPX Energy Little has been reported about WPX’s 2015 CAPEX, but recent developments seem to place the company on solid financial footing for 2015. WPX is raising capital by selling some of their assets. They are receiving $294 million for the sale of their interest on Apco Oil and Gas. They are also selling their operations in the Marcellus Shale to Southwestern Energy for $300 million. WPX is focusing its operations in 3 core areas, down from 5 last year. Most of their oil operations will be focused in the Williston Basin, particularly on Indian reservation land. Statoil There is little information about 2015 CAPEX. However, industry insiders are not looking favorably regarding Statoil in 2015. Statoil took major gambles in the last few years committing huge resources to new discoveries in Angola, The Norwegian Arctic and the U.S. Gulf of Mexico. All of them have failed. 11 With less cash on hand, and higher dividend to be paid out, it is expected by many that Statoil will cut its exploration budget. Analysts estimate that Statoil needs oil to rise back to $110/bbls to finance investments and dividends from its cash flow. 12 Statoil says it has handed
10
(Lynn Energy LLC 2015) (Reuters 2014) 12 (Reuters 2014) 11
back three of its four Greenland offshore oil and gas exploration licenses, as the play is considered too risky and too costly amid falling oil prices Burlington Resources (ConocoPhillips) ConocoPhillips has announced that they are cutting their capital investments by 20 percent. “We are setting our 2015 capital budget at a level that we believe is prudent given the current environment,“ said Ryan Lance, ConocoPhillips’s chairman and chief executive. 13 Even with the cuts, the company is projecting a 3 percent production growth in part because of increasingly productive wells in North Dakota. Whiting Petroleum Corp. Citing volatile commodity prices, Whiting Petroleum Corp is not releasing its 2015 capital expenditures budget till early 2015. Triangle Petroleum Corp. Triangle Petroleum Corp. has not released any information regarding 2015 capital expenditures. They are expected to release 2015 CAPEX in early 2015. Slawson Exploration Slawson Exploration is a privately held company and has no obligation to share financial information.
13
(Krauss 2014)
CONCLUSION Considering current commodity prices, all producers will be lowering their capital expenditures in 2015. Producers with sound balance sheets will decrease exploration in unproven areas and focus development in their core areas of operation. By doing so, production will still increase, but increases will be modest compared to 2014. As such, rig counts will decrease. However, “rig count” numbers are becoming a less important when comparing them over time. As drillers are becoming more efficient and producers are drilling multiple wells on a single pad, fewer rigs are needed. Also, vertical rigs in Texas are being pulled first, because drilling operators can be more efficient with horizontal rigs. Breakeven point in the Bakken is much lower than previously thought, as low as $29/bbl to drill a new well. Also, regulators are claiming that producers will not shut in a well until crude is at $15/bbl Many analysts are predicting that some smaller companies with little cash will be acquired by larger stable companies, so be on the lookout for mergers and acquisitions this year.
WORKS CITED Carolyn Davis. NGI Shale's Daily. November 12, 2014. www.naturalgasintel.com. Collins, Gabe. Seeking Alpha. January 12, 2015. www.sekkingalpha.com. Continental Resources. Continental Revises 2015 CAPEX Budget. Press Release, Houston: Continental Resources, 2014. Emerald Oil, Inc. Emerald Oil Announces Senior Management Change; Updates 2015 Guidance and CAPEX Plans. Press Release, Denver, CO: Emerald Oil, Inc, 2014. ExxonMobile. ExxonMobil’s Outlook for Energy Sees Global Increase in Future Demand. Press Release, Irving, TX: ExxonMobile, 2015. Helms, Lynn D. North Dakota Department of Mineral Resources. House Appropraition Committee Report, Bismark, ND: North Dakota Department of Mineral Resources, 2015. Krauss, Clifford. "Oil Falls to a 5 Year Low, and Energy Companies Start to Retrench." The New York Times, December 8, 2014. Linn Energy LLC. Linn Energy LLC is Getting Ready to go on a Shopping Spree. Press Release, Houston, TX: Linn Energy LLC, 2015. Oasis Petroleum Inc. Oasis Petroleum Inc. Announces Preliminary Ranges for 2015 and Provides an Operations Update. Press Release, Houston: Oasis Petroleum Inc., 2014. OGJ Editors. Oil & Gas Journal. December 18, 2014. www.ogj.com. Reuters. Statoil Could Pay High Costs for Response to Exploration Failure. Oslo, November 30, 2014. Wade, Terry. Rig Zone. December 22, 2014. www.rigzone.com (accessed 2014).
