North American oil spending to plunge $58 billion, Barclays says

HOUSTON – Saudi Arabia’s run at U.S. oil-company profits could inadvertently drive down costs in the shale oil patch, making the high-cost business more competitive, a Barclays analyst says.

For now, though, U.S. oil producers and oil field service firms are expected to cut deep into the North American shale boom. Oil spending in the United States and Canada could fall by as much as $58 billion this year if petroleum prices remain at current low levels, according to a Barclays survey released Friday.

That would be a 30 percent cut to last year’s estimated $196.1 billion in spending, largely driven by a retreat from zealous spending among North American oil companies. Barclays says, however, the cut is a moving target: Oil prices have fallen rapidly over the last four weeks as the British bank was collecting input from 225 companies.

“They all know they’re staring down a cliff, they just don’t know how far it goes yet,” said Dave Anderson, an oilfield service and equipment analyst at Barclays, in a conference call Friday. “We need to see a supply response, not just in production, but also in services.”

Spending, hedging lower

The industry downturn will prompt at least 500 U.S. land drilling rigs to come off the market by the end of the year, Anderson said. It’s a rapid change of pace for an industry that bolstered investments by nearly 10 percent last year.

Of the oil patches around the globe, North America’s is set to be the hardest hit by the oil crash. The pain could be intensified by the fact that North American small to midsized companies have outspent their cash flows around an average 157 percent, and larger firms have overspent by around 112 percent.

They also have less of their oil production hedged than last year. Just 32 percent of smaller firms had locked in prices for their production this year, compared to 46 percent last year. Larger firms have only hedged 14 percent of their production, compared to 26 percent in 2013, the bank’s data showed.

The proportion of North American oil firms expected to spend slightly less than their cash flow could move from 7.2 percent last year to 26.3 percent this year, according to Barclays. Fewer will spend more than they bring in.

They’ll probably curb spending the most in the Bakken Shale in North Dakota, with regions in the Eagle Ford Shale in South Texas remaining resistant. In West Texas’ Permian Shale, horizontal drilling will likely be a lot more resilient than conventional, vertical drilling, Anderson said.

At $50 a barrel, larger oil producers in North America would likely bring in $59 billion and spend $63.1 billion, while smaller and midsized firms would collect $12.9 billion and spend $15.1 billion, Barclays projected.

Falling costs

But in the end, Anderson said, the high oil field costs of the North American shale patch will be forced to shrink. Investors’ call for spending discipline – which preceded the oil crash by several months – will only intensify as oil prices are half what they were last June, he said.

About 44 percent of North American oil producers, according to Barclays, say they believe drilling costs and costs for services to get oil wells in shape to produce oil will fall 10 percent this year, including in pressure pumping, drilling fluids and directional drilling – some of the biggest costs in hydraulic fracturing.

“OPEC is trying to push the U.S. off the cost curve,” Anderson said, referring to the Organization of Petroleum Exporting Countries’ recent move to keep production up amid an oil supply glut and falling global demand. “But they’re inadvertently going to force the cost curve lower. As we see better technology and techniques, costs will move lower.”

Oil field acquisitions

That’s expected to force small oil service firms to consolidate through mergers and acquisitions.

“We often hear smaller service companies complaining about Halliburton undercutting them,” Anderson said. “But you know what? Halliburton can do that because they have lower costs.”

The firm, he said, is the fifth largest logistics company in the nation, with fleets of rail cars and other assets moving supplies to U.S. shale plays. And Halliburton is expected, for the most part, to cut costs after it closes a $35 billion deal to buy rival Baker Hughes toward the end of the year, he said.

“Halliburton is going to be an integral part of lowering costs,” Anderson said. “It’s going to force consolidation in the service industry. I think a lot of the smaller, mid-cap service companies are going to struggle to compete against the big guys.”