Article:U.S. tight oil production on growth path as cost falls
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First quarter 2018 results released by US onshore operators in May confirmed that public shale companies are currently on track to achieve guided production growth targets and investment levels for the full year 2018. Moreover, the majority of the operators claimed to be well positioned to handle the risks associated with takeaway capacity constraints in the Permian basin. However, Rystad Energy’s analysis indicates that only up to half of originally guided production growth in the Permian is currently secured by firm transportation commitments. The rest could be exposed to significant local price differentials in 2018, pushing operators to explore alternative options of outbound crude disposition.
In order to evaluate the performance of shale companies during 1Q 2018, we analyzed reported results for a peer group of 25 US onshore operators. We observed that producers have increased oil production in the US by 5% on average during 1Q 2018 compared to 4Q 2017, with the highest increase realized by pure-Permian producers.
Figure 1 shows achieved growth in oil volumes during Q1 2018 relative to reported oil production in Q4 2017 for all companies selected. Operators are further split into pure-Permian operators, which produced nearly 100% of US volumes from the Permian basin, Permian-focused companies with around 50% of supply from the Permian, and other key operators with a more diversified portfolio of assets across US shale plays.
The results indicate that on average pure-Permian companies achieved higher production increases than other producers in the sample. Operators like Diamondback, Concho, Parsley and Centennial grew oil production by more than 10% compared to Q4 2017 levels. Diamondback and Parsley increased oil output by just under a third relative to the full year 2017 and expect to realize a moderate increase in 2018. Centennial ramped up output by about two-thirds compared to 2017 and guides an additional 12% for the full year 2018. On the other hand, Concho Resources attained 11% oil growth relative to Q4 2017 and already matched its guided year-over-year oil increase of 20%. Among other producers, Chevron stood out as the company that significantly increased oil production in the Permian basin during 1Q 2018. While the company’s total US oil output grew by 9%, Permian shale oil production increased by more than 20%, now trending above the original guidance.
In contrast to the majority of Permian companies, Resolute Energy and Energen showed a reduction in oil production for the period. Energen’s results follow the company’s guided expectations for a decrease in oil supply during the first half of 2018 with significant growth expected by the fourth quarter. Resolute, however, produced 13% less oil than in Q4 2017 attributing this to better than expected results from predominantly gassy wells. Nevertheless, Resolute’s daily production in the Permian during Q1 2018 was still lower than in Q4 2017.
For the selected companies, we also reviewed E&P investments made during Q1 2018 and compared these values to the total spending guided for the year 2018. Figure 2 depicts capital expenditures for the first quarter relative to the total capex guided in 2018. The results indicate that on average US onshore operators spent around 28% of total targeted D&C expenditures during 1Q 2018. A number of operators, such as EOG, Apache, QEP, WPX invested more than 30% of planned capital. This could suggest that shale companies are more likely to reach the upper range of their capex guidance compared to the mid-point estimate or might even increase the capex target later in the year, despite the prevailing negative sentiment from investors. However, multiple producers also mentioned that capital expenditures are more weighted towards the first half of the year with lower spending expected in the second half.
Amid ongoing concerns regarding takeaway bottlenecks in the Permian basin and the resulting widening of the Midland differential, we looked at 1Q 2018 realized prices for our selection of companies and reporting around their strategy to address these issues in 2018 and going forward. Diversified portfolios, in-house midstream infrastructure and secured pipeline commitments were the key drivers behind higher realized prices in 1Q 2018.
Figure 3 represents average realized oil prices reported in Q1 2018 and resulting WTI NYMEX differentials for the selected producers. EOG and Anadarko are the only operators from the peer group that secured positive WTI NYMEX differentials in 1Q 2018. Both companies have diversified portfolios across multiple shale plays and thus are not exposed as much to potential capacity issues.
The majority of pure Permian operators ended 1Q with a negative differential close to $2 to WTI NYMEX while the WTI Cushing average spread leveled at negative 40 cents. In general, most Permian companies ensured investors that they targeted diversified pricing strategies, secured firm transportation commitments for 80-90% of oil production in 2018, and intended to mitigate financial risk through basis hedging.
In contrast to the majority of the operators analyzed, SM Energy did not reveal much information about their strategy to address takeaway constraints in the Permian this year. The company also realized the largest price differential of negative $4 per barrel during 1Q 2018, as SM’s volumes are primarily Midland basis priced. This might indicate that the company is more exposed to the takeaway capacity issues than the peers are.
Overall, despite operators’ efforts to provide clarity and assurance on their ability to meet production growth targets amid Permian takeaway constraints, it should be noted that as capacity is coming close to full utilization, guided growth in Permian oil production is at risk. While companies on average targeted around 15-20% oil growth in 2018 relative to Q4 2017, at most only 80-90% of total volumes are secured through transportation commitments. This signals that only up to half of initially expected Permian oil production growth is currently secured, the rest runs the risk of significant exposure to local price differentials in 2018. This pushes operators towards exploring alternative options of outbound crude disposition like trucking and rail.