MIDLAND – Oil producers,, large and small, are slashing spending plans for 2015 as crude prices have tumbled below $50 a barrel.
Apache Corp. is cutting its North American budget 26 percent and ConocoPhillips and Rosetta Resources each 20 percent. Chevron has delayed announcing its 2015 plans, while Linn Energy has halved its budget plans.
Midland’s Concho Resources just announced it has cut its capital program to $2 billion as a result of falling prices. Of that, $1.8 billion will be spent on drilling and completion and $200 million for facilities, midstream and other capital.
Concho also will reduce the number of drilling rigs it operates, from the current 35 to an average of 30 in the first quarter and approximately 25 rigs from the second quarter through the remainder of the year. At that level of activity, Concho plans to generate 16 percent to 20 percent year-over-year production growth.
Steve Pruett, president and chief executive officer of Elevation Resources, said his board had approved a $227 million capital budget in early December.
“I’m going back to the board and asking that it be cut to $100 million,” he said.
Half of that amount will be on four wells currently in process or waiting on fracture stimulation and the remainder for discretionary spending that will generate economic returns in the current price environment, Pruett said.
Elevation has cut its rigs from six to three, and by the end of January will be operating one rig that will drill a couple — out of eight prospects — that are still economical. Another reason for drilling will be to maintain leases, he said. Outside operators will be drilling wells in New Mexico on the company’s behalf, Pruett said.
“We are going to invest as little as we can in this environment,” Pruett said.
Diamondback Energy is another Midland operator scaling back its 2015 plans.
“Diamondback plans to defer acceleration in 2015 as previously communicated, and run three horizontal rigs starting in February when the company releases two of its horizontal rigs and its remaining vertical rig,” reported Travis Stice, Diamondback’s chief executive officer.
“Consistent with a slower drilling program, our budget for drilling, completion and infrastructure ranges between $400 to $450 million, which represents more than a 40 percent reduction from the initial plan to run eight rigs. We can further moderate spending by controlling the pace of completions, which currently make up almost 60 percent of the total well cost and have yet to fully recalibrate with the lower commodity prices,” Stice continued.
He went on to add that “Diamondback’s focus this year is on capital discipline, stockholder returns, and maintaining a strong balance sheet. We are well hedged in 2015 with more than half of our forecasted volumes hedged at $88 a barrel. Further, with this decreased pace, even at $50 a barrel WTI, we will cross over to cash flow positive in the second half of 2015. With our focus on returns, we will continue to drill where returns are the highest.
“These downward cycles in commodity prices, which the Permian has experienced multiple times over the decades, also represent opportunities to grow for those companies with strong balance sheets like Diamondback.”
Joseph Castillo, president of Bold Energy III LLC, said the company had planned to ramp up activity this year but instead will spend half what it spent last year to drill new wells.
“I was shocked when oil fell to $75; I felt it would rebound quickly,” he said, but reports and news stories he read convinced him there was significant downward pressure on oil prices.
Bold will continue to focus on its Reagan County Horizontal Wolfcamp, drilling six horizontal wells this year, Castillo said. Even as successful as that program has been, “these wells a re under serious economic pressure. We’re drilling to maintain leases. We have to protect our acreage at all cost,” he said.
Henry Resources will cut activity about 30 to 40 percent, said Danny Campbell, president. Last year the company ran three or four rigs all year and this year will operate two through the first half of the year.
“We’ll make a decision, probably in the summer, if we want to add a third rig. It will depend on how oil prices and service costs are doing,” he said.
Henry will be drilling some horizontal wells and continuing to be active in the Wolfberry as well as drilling in the Devonian, Campbell said.
“We’re not cutting back in any one area, we’re cutting across the board,” he said.
He said the company had prepared as well as it could, but no one expected oil prices to fall so low and so quickly.
The year will be tough for Midland, especially if a significant number of rigs drilling in the Permian Basin are laid down, Castillo said. If that happens, “there will be a lot of families affected. But we always come back.”
Pruett said it may be a year, perhaps two, before supply and demand come back into balance and boost prices. Another need is for service costs to come down 20 percent to 30 percent and signals that oil prices are going to move higher.
“We shouldn’t have had $100 oil, but we can’t justify $47 oil, either,” he said.
For his part, Castillo sees an improved environment this year.
“We think prices will rebound to some degree this year – I don’t know what that will look like, but I can’t imagine a scenario where they won’t. I don’t think they will be above $75 this year.”
Campbell predicted it will take at least 18 months to two years for oversupplies to be eliminated.