HOUSTON — The median North American independent producer can survive at about a $42 per barrel of oil equivalent price, according to a new analysis by credit rating agency Moody’s Investors Service.
The study compared the full-cycle cost of production among independent producers and found that many could easily handle low commodity prices thanks to significant cost savings and continued production growth. Full-cycle costs include the cost of producing each barrel of oil equivalent as well as the cost of finding a new barrel to replace the one produced. The calculation also includes interest payments companies need to make to service any debt.
“Total full-cycle costs are a good if not perfect proxy for the company’s total economics and breakeven cash costs required to both produce and replace production, and to service debt,” Moody’s analysts wrote.
Pittsburgh-based EQT Corp., a large natural gas driller in the Appalachian Basin, had the lowest costs at about $13.07 per barrel of oil equivalent. Randor, Pennsylvania-based Penn Virginia Corp., had the highest full-cycle costs at about $135 per barrel of oil equivalent, Moody’s said.
“The average full-cycle cost of $44/boe and portfolio median of $42/boe signal that some E&P companies with a high proportion of liquids production could withstand oil prices at a relatively weak pace price of $50/boe in 2015, but a number of companies with unsustainable high cost structures must reduce total full-cycle costs significantly,” the ratings agency wrote.
Only a portion of the average company’s full-cycle cost came from producing existing oil and gas.
E&Ps paid an average of $13.68 to bring one barrel of oil equivalent to the surface. Production costs were higher among companies that mainly produced oil, while natural gas companies drilled for less. EQT had the lowest production costs and Canadian Oil Sands Limited had the highest, according to Moody’s figures.
Administrative costs averaged about $4.52 per barrel of oil equivalent, interests costs averaged $5.60 per barrel of oil equivalent. Administrative costs were lower among companies that pumped the highest volumes, spreading the costs over a wider base. Interest costs were lowest among the largest companies with the highest-rated debt. Occidental Petroleum Corp. had the lowest interest costs of $1.19 per barrel, Moody’s said, while Halcon Resources Corp.’s interest costs came to $21.83 per barrel.
The largest expense among producers was finding and acquiring new oil and gas. Here, Moody’s cautioned that their numbers aren’t definitive, because their study only examined a single year of expenses and companies usually spend money and book reseves over a years-long period. The ratings group calculated an average of $49.27 cost for each per barrel of oil equivalent added to reserves, while the median was $26.10 per barrel of equivalent.
Each of these calculations is somewhat distorted by different accounting practices across companies, as well as different factors included in reporting, Moody’s cautioned. For example, Canadian oil sands producers’ costs are raised because they need to purchase diluent, a lighter type of oil that helps the heavy oil sands crude flow through pipelines. Other costs have been muddled by the large upfront cost of an acquisition or litigation.
Still, Moody’s said, many costs have been significantly cut in 2015. Companies have spent 30-40 percent less in U.S. basins and new rig contracts are charging 15-20 percent lower day rates.
“North American E&P companies experienced significant cost reduction in the first half of 2015, and we expect further cost reductions in the second half of 2015,” Moody’s wrote.