Birthday of 2014 Oil Crash

Crude Price History
Crude Price History

This week marks the birth of the 2014 oil crash and a closer look suggests that things aren't as bad as some predicted.

What started as a slow decline in June 2014 accelerated into a full-blown crash throughout the fall. When prices finally bottomed out in March, they had dropped by more than half from over $105.00 to $48.00.

By last December, uncertainty fueled the news machines and cries of doom became commonplace. Some analysts predicted possible economic ruin for oil-dependent states and others warned of the crippling of the industry.

But many seasoned oilmen saw the downturn as a wake up call of sorts and an opportunity for producers to take a hard look at their systems, processes, personnel, technology and strategies outside of the frenetic pace the boom required.

Read more:  Oil Bust Brings Opportunities

Cutting Costs: Over the last few month, producers have been forced to tighten their budgets and change their strategies in order to stay competitive. These tactics have worked well and first quarter results show many companies have been able to stay the course and gain strength by slashing costs associated with drilling through greater efficiencies and supplier reductions.

  • Sanchez reported Q1 costs at 30 to 40% below fourth quarter 2014
  • Matador reduced operating costs 30% to 40% for Q1
  • Continental’s drilling and completion costs fell by 15%
  • EOG announced it has benefitted greatly from the pull-back in activity and progress is being made to lowering cost in each phase of their operations

Innovation: Cutting edge producers are pushing the science and technology to new levels as they work to get the most out of their resources. These include advancements in 3-D seismic research, telemetry, remote guidance and innovations in  CO2 or nitrogen-style completions.

Oil production is becoming a modern manufacturing process. The frackers are engaged in ‘just-in-time’ production, analogous to the methods pioneered by Japanese manufacturers in the 1970s and 1980s, which led directly to hyper-efficient global supply-chain management perfected by Wal-Mart in the 1990s.
— Wall Street Journal

Economic Impact: Thousands of jobs have been cut across all sectors of the industry, but both Texas and North Dakota report that the oil crisis has had minimal impact on their states. Data shows that Texas dipped in the first quarter but is already showing signs of a rebound and the North Dakota Department of Commerce boasts that the ND economy is still booming.

Dropping Rig Counts: The national and regional rig counts took a big hit this year as producers pulled rigs offline to save money. Many report that these wells are waiting in the wings and are ready to be put back into production later this year.

Record Production: Even in light of the price drop, production over the last 12 months has been at record levels. The EIA data published this month shows that global petroleum oversupply has more than doubled to 2.6 million bpd since the end of the second quarter last year and they expect the oversupply to last at least until 2017.

Oil Export Ban Hurts Eagle Ford

Eagle ford
Eagle ford

A new study from Rice University reveals that the decades-long oil export ban is having the greatest impact on producers in the Eagle Ford Shale region of Texas. The study takes a unique look at the dozens of crude types on the open market and tries to calculate their potential prices in the absence of trade barriers.

Related: Oil Prices Can Vary A Lot Across the U.S.

The oil that is pumped out of the Eagle Ford has less sulpher than WTI or Brent and would attract a higher price on the international market.

According to the report, the U.S. refining infrastructure isn't designed to handle the domestic crude qualities that are in abundance today, which has caused prices to be lower relative to internationally traded crudes.

If the ban were lifted, it would immediately allow the sale of domestic crude oils into the international market, where prices reflect differences in crude quality and therefore would be higher for the light crude oils being produced from shale plays.
— Ken Medlock, Rice University's Baker Institute for Public Policy

Earlier this month, IHS issued a report on the implications of the current ban and concluded that lifting the export ban could create hundreds of thousands of additional U.S. jobs and add billions to the U.S. economy. The report goes on to say that eliminating the ban will have far-reaching consequences for the U.S. economy including:

  • Further increases in domestic oil production
  • Lower gasoline prices
  • 964,000 additional jobs
  • Benefits to manufacturing and service-related sectors in every state
  • Strengthening national security and America’s position in the world

Related: Oil Export Ban Is Hurting Your Royalty Checks!


IHS: U.S. Shale Growth Still Strong, Despite Lower Oil Prices

Pump Jack Image
Pump Jack Image

The dip in oil prices isn't making a huge impact yet on the vast majority of U.S. shale production.

According to a report by research consultancy IHS Energy, most shale plays are economic and ~80% of potential drilling in 2015 would remain strong at WTI crude oil prices as low as $70 per barrel.

Since 2008 the cumulative growth in U.S. tight oil production has been 3.5 million b/d—far exceeding supply gains from the rest of the world combined—making tight oil the key driver of global supply growth,” said Jim Burkhard, Vice President, IHS. “While current lower crude oil prices do present challenges for new investment, IHS analysis shows that the vast majority of potential U.S. supply growth in 2015 remain economical at $70 for WTI.

WTI traded at ~$76 on Monday, a nearly 20% drop since September. As a result, operators in Texas, including ConocoPhillips and Eagle Ford-focused Clayton Williams, have already announced plans to potentially scale back their drilling programs in 2015.

Read more: Worried About Oil Prices? What to Expect in the Eagle Ford

Growth Still High, But Expected to Slow in U.S. Shale Plays

At lower prices, growth will slow, but still remain high, according to the IHS report. In 2015, IHS estimates U.S. shale production will grow by 700,000 b/d at an average price of $77 per barrel in 2015. By contrast, in 2014, growth from U.S. shale plays was more than 1-million b/d.

Approximately 80% of anticipated production has a break-even price between $50 to $69 per barrel, according to IHS analysis.

Expectations of the future—and the trajectory of oil prices—means that prices do not need to fall to the breakeven price before psychology, investment, and thus output, is affected.

The report notes that existing tight oil production is unaffected by the recent drop in oil prices. Existing wells can remain economical at crude oil prices far below the break-even price for new production because most of their costs are incurred during the initial development phase of the well.

Sanchez Energy Stock Dips, Despite Good Q3 Production

Sanchez Upper Eagle Ford Wells Production Rates
Sanchez Upper Eagle Ford Wells Production Rates

Amid a drop in oil prices, Eagle Ford-focused Sanchez Energy, has seen a sharp dip in its stock price, falling nearly 35% in the past month to ~$18.50. According to the investment research firm, Zacks, the Houston-based company's earning picture suggests the slump may continue.

Despite its 30-day earnings consensus moving lower over the last 30-days, Sanchez returned excellent third quarter production results. During the reporting period, Sanchez's estimated portfolio wide production was 38,613 boe/d, an increase of 91% over the second quarter 2014 and an increase of 228% compared to the same period a year ago. The company reported total production volumes for the quarter of 47% oil, 27% NGLs, and 26% natural gas.

The company has planned for and is poised to rapidly adapt to a changing commodity price environment. As of September 30, 2014, SN’s liquidity was approximately $900 million, consisting of $600 million in cash and an undrawn revolver with a $300 million elected commitment from a$362.5 million borrowing base. Current liquidity combined with future operating cash flow is expected to fully fund the Company’s anticipated 2015 capital program. SN’s substantial amount of HBP acreage and long-term leases allow it to treat the majority of capital spending as discretionary. The Company’s only significant capital commitment is Catarina’s continuous drilling provision of 50 wells per year, which SN believes can be met with 2 to 2.5 rigs per year. Since inception, SN has intentionally avoided long-term contracts and commitments for goods and services in order to maximize its flexibility.
— CEO Tony Sanchez III

At the end of the second quarter, Sanchez Energy closed its massive $639-million Eagle Ford acreage deal with Royal Dutch Shell for 106,000 net Eagle Ford acres.

Read more: Eagle Ford Deal Closings

In the third quarter, Sanchez focused on assuming operations in its new 'Catarina' acquisition. According to officials, two rigs have been deployed on the western part of the asset drilling development wells targeting the Lower Eagle Ford, while a third rig has begun appraisal drilling on the eastern section of the asset, also targeting the Lower Eagle Ford. The company has also completed the first group of wells that were drilled by the previous operator in the Upper Eagle Ford, and they are now online and flowing to sales. The 9 Upper Eagle Ford wells had initial 24-hour average production rates ranging from 973 boe/d to 2,117 boe/d, with average production rates of 1,402 boe/d, with a 64% liquids cut.


Where Are Oil & Natural Gas Prices Headed? Gary Evans of MHR

Where are natural gas prices and oil prices headed in 2013? Gary Evans discusses his view US oil & gas prices.

Notes from the interview include:

  • Need cold weather for natural gas prices to recover
  • The industry needs $4 natural gas prices
  • Technology has allowed for recent shale boom
  • China and India are thirsty for oil
  • The US is producing more than 50% of what it consumes
  • WTI to Brent spread allowed for the recent run up in oil prices
  • Not bullish on oil prices, but expects more upside to natural gas
  • Difficulty in leasing is really a federal lands issue

Do you agree or disagree? Share your thoughts in the comments below.