US rig count to bottom next summer


Highlighting all of the top stories and what to look for in the week ahead, our 'week in brief' notes keep you informed on the North American Upstream sector, including the Lower 48, Gulf of Mexico, and Alaska.

9 October 2015

US rig count to bottom next summer

With US horizontal oil rig count sitting at 487, we have readjusted our outlook to reflect a bottom of 392 rigs in June 2016 – a significant change from our previous forecast which anticipated a low of 488  in October 2015.

horizontal oil rig forecast

This change is driven by our expectation that, should oil prices remain flat until the end of this year, operators will make a meaningful capex cut in 2016 as they look to spend within their cash flows.

Oil production will feel the impact nine months later. We expect output to bottom at 6.6 million b/d in March 2017, down from 7.4 million b/d this year. Rig activity will hold flat next summer before back rigs are added in late Q3 2016 when our WTI price forecast surpasses $60 per barrel.

The dramatic reduction in rig activity is reflective of the percentage of production coming from top tier areas. In 2016, only 50% of rigs are needed to achieve 80% of the new production we see today.

Capex reductions in 2016 could also pave the way for a greater draw down of drilled but uncompleted wells in 2016. However, we note that this process is highly iterative and, should WTI react more strongly or sooner to evidence of US production declines, we may not see such a relatively severe rig count decline.

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us upstream stories covered this week

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2 October 2015

Will Shell's dry hole derail future Arctic interest?

On 28 September, Shell announced it will not pursue further exploration at the Burger field in the US Chukchi Sea. Although the company successfully drilled to a total depth of 2,070 metres (6,800 feet) and encountered oil and gas, it said the results were not sufficient to justify any further activity.

Arctic Ocean

This announcement ends a nine-year exploration programme that Shell pursued with a 100% working interest. After paying US$2.1 billion in signature bonuses in 2008, the company spent more than US$5 billion on the programme that resulted in just one tophole and one completed well.

This negative result underlines many of the challenges that operators face elsewhere in the Arctic, including environmental sensitivity and stringent safety regulations. The move also fits into a larger industry trend of pulling back from high-cost ultra frontier exploration to free up capital to focus on lower-risk exploration and appraisal.

The Bureau of Ocean Energy Management has scheduled lease sales in the Chukchi and Beaufort seas in 2016 and 2017 respectively. However, with Shell's results casting deep uncertainty over the viability of the US Arctic, we expect extremely low levels of participation and interest, with this decision potentially deferring all exploration in Alaska's federal waters.

Read more in our Inform, Shell to abandon US Arctic exploration efforts, September 2015. 

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24 September 2015

Eagle Ford acreage to swap hands for $118 million

Alta Mesa has announced its exit from the Eagle Ford with a sale to EnerVest for $118 million – EV’s second announced deal this month.

The acreage is located in and around Karnes County and operated primarily by Murphy Oil. We assume a 515 mboe type well in this project, one of Murphy’s most economic Lower 48 assets.

This sale is true to EnerVest’s strategy of buying mid-life assets and gives Alta Mesa additional capital to fund its drilling programme in the Mid-Continent STACK play where the company faces acreage expirations. It should put the proceeds to work quickly to hold acreage so watch for a rig and/or permit bounce. Alta Mesa is also hunting for acquisitions to expand – another option for reinvestment.

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03 September 2015
Premier Permian acreage holds its value

This week, acquisition and exploration company W&T Offshore announced that it would sell 25,800 net acres - primarily located in northwest Martin County in the Deep Basin sub-play of the Wolfcamp - to Ajax Resources for US$376 million.

On an adjusted basis, the agreement falls closely in line with our base case Wolfcamp Key Play valuation of US$12,600/acre. However, while the deal valuation appears strong at first glance, it falls more than 50% short of the valuations RSP Permian and LINN Energy put on deals in Martin and Howard counties this summer.

This gap can be explained by taking into account upside potential from the prolific Spraberry formation in Martin County, bordering the sub-economic Northern Extension sub-play. Unlike other deals, the W&T package is not exposed to the Spraberry.

28 August 2015
Water management: the next wave of upstream cost savings?

Water-handling charges, which have remained stubbornly high throughout the shale boom, are coming under greater scrutiny as operators look for innovative ways to recycle costly flow-back water.

Although Marcellus operators have trimmed 14% from total well costs in the past year, water costs continue to grow, totalling $1.4 million per well on average.

SW Marcellus well cost example

As a result, Antero Resources recently invested $275 million to develop a 60,000 b/d wastewater treatment facility in West Virginia and has predicted cost savings of $150,000 per well.

Similarly in the Permian, Pioneer has just signed a $117 million contract with the city of Odessa, guaranteeing access to up to five million gallons per day of treated municipal wastewater for 11 years.

The water will feed the company's 20-mile water pipeline system under construction in Midland county. Pioneer is to pay $6.33 per thousand gallons and expects to reap savings of $500,000 per well when the entire system is operational.

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21 August 2015
Shrinking crude prices spark further high-grading
As a result of unscheduled downstream bottlenecks, last week WTI drifted below $42/bbl - a level last reached in 2009 - and WCS reached $25, its lowest point since 2008. We expect depressed prices to persist through the end of the year and see WTI prices averaging just over $51/bbl in 2015. Clients can read more details in Global macro oils short-term outlook early August 2015.

This new low is accompanied by further high-grading of acreage and rig fleets, as well as greater cost cuts. We estimate that many onshore assets need to make a 15% further cost reduction to break even at current prices.

Exploration and production company Energy XXI has just slashed its 2016 development budget by 80% but plans to hold production flat. At this year's EnerCom Conference in Denver, operator morale was surprisingly high, with numerous companies messaging flat production volumes despite massive capex cuts. We currently model over 75% of companies with 2015 production at or above 2014 levels.

Changes in type curve

Tight oil operators

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14 August 2015
Canadian heavy crude benchmark price hits seven-year low
WCS, the heavy Canadian crude benchmark, reached US$24.60 per barrel on 11 August – the lowest levels since 2008. As crude supply rose, the WTI-WCS differential widened from about $7-8/bbl in June to $17/bbl.

WCS prices and differentials

The situation has been exacerbated by Enbridge’s shutdown of key pipelines following leaks while BP’s Whiting refinery reported an unplanned, month-long outage of its 240,000 b/d crude processing unit which could pressure the WTI-WCS differential wider for longer.

Year-to-date WTI-WCS has averaged $10.90/bbl and we expect it to average $12/bbl in 2015. Wider WTI-WCS differentials support economics for railing crude from Alberta to the US. Clients can get more details in Oil prices: Heavy discounts to Canada's heavy crude benchmark.

In a rare move last week, PBF Energy shipped crude from Western Canada to its refineries on the US East Coast via the Panama Canal. However, we do not expect this route to become the norm due to bottlenecks caused by the limited pipeline capacity from the Alberta oil sands to Canada's west coast. There is currently only one pipeline on this route which has been on allocation for over four years. PBF currently moves heavy Canadian crude by rail to its Delaware City refinery. 

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Our North America upstream research offers a unique granular perspective. From historic well-level data to detailed sub-play reports, we provide well performance, costs, economics and benchmarking analysis that will help to put you at the forefront of operations in the region.

To discover more, register your interest and we will contact you.

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