Spending, Rig Drops Are Slow To Cut Oil

While U.S. shale producers have slashed billions of dollars from capital budgets and taken more than 600 oil rigs offline since October, it may be several months before production actually falls as companies focus on their most efficient wells.

And even when the U.S. retreat does take effect, some firms are already looking ahead to mounting a rapid comeback.

The spotlight has fallen on U.S. companies to be the new swing producer that rebalances world oil markets, after Saudi Arabia shrank from that long-time role last November and vowed to keep output steady despite plunging crude prices.

On Friday, Baker Hughes (BHI) said the U.S. oil rig count fell by 33 to 986, the lowest since June 2011. Days earlier, the Energy Information Administration said U.S. oil production climbed to 9.29 million barrels per day during the previous week, the highest weekly figure on record, and inventories hit a fresh record high for the fifth straight week.

Midyear Peak Expected

Such growth has contributed to a widening in the price spread between U.S. and global benchmark prices. On Friday, West Texas Intermediate closed at $49.76 a barrel and Brent at $62.58, expanding the gap to $12.82 from $11.88 on Thursday.

To be sure, EIA sees low oil prices having an effect and cut its 2015 U.S. output forecast to 9.3 million barrels per day from 9.42 million, though that would still be an increase from 9.13 million at the end of 2014.

But EIA doesn't see output falling until the third quarter. Other estimates back that view, with Citigroup analysts seeing the oil supply glut lasting through the first half of the year. Simmons & Co. analysts expect crude supplies will peak in the spring.

Continental Resources (CLR), a bellwether for the shale sector, said its production will rise through the middle of the year and level off in the second half, as it defers well completions in the Bakken shale formation until prices improve. But total 2015 output will grow 16%-20%.

By Citi's estimates, the U.S. producers it covers look to invest $50 billion this year, about half what they spent in 2014, and production will increase 6%.

High Grading, Adding Rigs

EOG Resources (EOG) slashed its 2015 capital spending budget by 40% from 2014 levels and said during its earnings conference call it's not interested in growing production if prices stay low.

"We could have flat to maybe even negative U.S. production growth on a month-over-month basis by the end of this year, and that's certainly going to slow down U.S. production growth," said CEO Bill Thomas.

But capital spending cuts will do only so much to curb output as producers narrow their focus to the most productive areas of a shale play, a practice called high grading, according to a Feb. 20 Goldman Sachs report.

It also pointed out the overall U.S. rig count is falling at a slower pace, especially in the Permian Basin, where it is actually climbing in some places. "At the county levels, this week finally showed signs of high grading with rising rig count in the most productive Permian counties.

Goldman added that high grading will become more apparent, meaning more production per rig, and said the rig-count drop is easily reversible, given the flexibility in bringing back rigs — and at a lower cost.

Carrizo Oil & Gas (CRZO) plans to spend most of its budget in the Eagle Ford shale formation in Texas, saying that 80% of its wells there are expected to be economical even if oil prices dip below $44 per barrel.

"Despite the low breakeven cost of our assets, we think the prudent thing to do in this environment is to downshift our production growth until commodity prices recover," the company said in a statement.

Carrizo will invest 35% less this year, with oil production expected to rise 17%, down from last year's 63% jump.

Linn Energy (LINE) said that despite cutting capital expenditures significantly, it sees only a "modest decline in production during the year as a result of the stable character of its asset base.

Although some companies are cutting output and hunkering down while prices stay low, they are poised to ramp up again.

Rosetta Resources (ROSE) gave production guidance of 58,000 and 62,000 barrels of oil equivalent per day for 2015 and 2016 respectively, down from the 66,000 BOE per day it averaged in 2014.

"We've chosen to defer production growth and focused instead on living within our means, maintaining our core acreage positions, and defending a target production level of about 60,000 boe per day," CEO Jim Craddock said in a statement. "Our project inventory is intact and we stand ready to increase capital spending when commodity prices warrant."