Despite lower 2015 capex, could continued oil output gains delay price recovery?

Upstream operators that released 2015 preliminary capital budgets a few months before the year-end holidays have returned to the surgical table for more fiscal liposuction on already slender frames.  Despite this, they and other producers insist they can continue to grow oil production this year, and for some, growth will be in the double-digits.

Last week alone, small producers Halcon Resources, Sanchez Energy and Concho Resources all slashed projected 2015 capital spending by 48%, 29% and 33%, respectively.  In some cases this was the second revision from preliminary figures announced before oil prices began their steep descent to current levels below $50/b.

They are not alone.  Even the bigger players such as Continental Resources, a big Bakken Shale producer, said in late December its capex would be 41% lower than contemplated in early November when prices were still in the high $70s/b range, while ConocoPhillips will shave 20% off its budget compared to last year.

Of course, the budgetary chopping block is a response to oil prices that have plunged more than 50% in recent months, a drop particularly after OPEC opted in late November not to cut its production.  The price of oil is still below $50/b, down from a recent peak of $107/b in mid-2014.

But production will still continue to grow for all these operators:  Sanchez expects 40% higher output this year than last; for Concho, it’s 16-20% more; Halcon’s should come in at more modest 4% higher.  Continental expects 16-20% higher production in 2015, although its earlier budget had projected 23-29% output growth, and ConocoPhillips pegs its output growth at 3%.

These are impressive production yields, although the smaller companies are coming off a lesser output base.  For example, at ConocoPhillips’ estimated 1.53 million b/d of average oil equivalent production for 2014, 3% growth spells an extra 46,000 boe/d of hydrocarbons on the market.  (Important to note: companies’ production jumps are for oil, natural gas and gas liquids, although for most companies these days the bulk of output is liquids, largely oil.)

Still, amid the bare-bones budgets is one key issue:  will the continued gush of wells delay the price recovery?  

If so, by how much?   After all, oversupply is being blamed for dragging the price of oil down a steep slope the last seven months.

 Analysts widely expect oil supplies to continue growing this year, even at lower prices.  While some are saying 2016 will be the turnaround year for a production response to low prices, others now think oil supply growth could continue into 2016. 

Way Forward?

...geopolitical events could disrupt output of a producing country and prod oil prices up from perceived supply scarcity.  Or inefficient and overleveraged companies may be swallowed up in M&A activity, or just quit drilling.  At such times the entire industry becomes more compact and more capable — that is, more efficient.

So ironically, efficiency, which basically got the industry into an oversupply situation as prodigious oil volumes gushed out of such horns of plenty as the Bakken Shale in North Dakota, the Eagle Ford Shale in South Texas and the Permian Basin in West Texas/New Mexico faster and at climbing rates, could also help lead it out. But that’s the nature of markets.

Read the full article by Starr Spe: http://blogs.platts.com/2015/01/13/capex-oil-output-price/