The majority of US shale producers have now posted first quarter 2020 earnings results, which indicate that higher volumes of oil curtailments are to be expected during the second quarter as compared to the numbers reflected in our update from last week. In total, we have analyzed the results of 31 oil operators and conclude that net oil production cuts in May could reach 835,000 barrels per day (bpd) and 877,000 bpd in June, an increase from about 256,000 bpd of cuts projected for April 2020. This represents gross curtailments of over 1 million bpd in May and June and at least 1.5 million bpd if total gross liquids output is considered. Adding the potential contribution from private and smaller operators, which are likely to see greater struggles, total gross liquids output curtailment can easily hit 2 million bpd in June.
The cuts will be delivered through a combination of measures, including the deferral of wells put on production (POP), moderating output from producing wells, and temporarily shutting in lower margin wells. Such decisions are fully driven by economic and technical considerations, and marketing or third-party constraints were not mentioned as a real concern by the companies analyzed. Some producers expect that currently projected June cuts may eventually increase depending on the prevailing oil price, but curtailed oil volumes should mostly return to pre-cut levels in the third quarter of 2020. Most operators specified that it will not take long before production can be fully restored on affected wells, as they aim to preserve reservoir and well integrity when deciding to moderate output or shut in wells. In the end, the rather difficult situation at present is promising an accelerated transition for E&P companies, which will be beneficial for all stakeholders involved. The US shale sector is expected to become healthier, with strong companies becoming even stronger, marking the beginning of a new “Shale 3.0” era.
Among the new companies that have provided plans for oil curtailments since last week, EOG Resources has cut production the most. The company plans to curtail May oil volumes by 125,000 bpd and 100,000 bpd in June, which represents about 26% and 21% of its 1Q oil output, respectively. Even though 90% of its shut-in production is cash flow positive at $10 per barrel, the company elected to shut in existing and defer additional production, rather than sell it at the lowest price point of the year. This will allow EOG to exert more control over the cash margins of every barrel and provides the ability to quickly increase oil volumes in an improving oil price environment. Ultimately, the decision to begin increasing production will be based on a more sustainable and constructive outlook for oil prices in the second half of the year.
Ovintiv (OVV), another large diversified producer, has cut May and June output by 35,000 bpd net, which is about 22% of its 1Q oil production. The curtailments will be delivered through shutting in wells, restricting rates on new wells, and deferring the production of recently completed wells. The company expects that shut-ins could increase in June. Its multi-basin portfolio is an advantage as the company manages curtailments in real time, recognizing not only benchmark prices but regional differentials and differences in the product mix. OVV decided to shut in a larger percentage of the Uinta Bakken and Eagle Ford production and a much smaller percentage of the Permian and Anadarko volumes.
Continental Resources (CLR) colored in its outlook as well, after it previously mentioned shutting in nearly all wells in Bakken. In total, the company has curtailed 70% of its oil production with more than a 90% cut in Bakken Shale. We have thus adjusted our CLR numbers up by about 10,000 bpd and the operator is now expected to cut 141,000 bpd over May and June.
Noble Energy has curtailed around 7,500 bpd in May but plans to increase cuts to roughly 35,000 bpd in June, which is 30% of its 1Q oil production. The shut-in decisions will be made in two tranches: first, lower productivity wells which are not covering variable operating costs, and then the deferral of production from certain higher rate wells for better value in a future higher oil price environment. The exact amount and duration of these curtailments is uncertain and will depend on the recovery of oil prices going forward.
Additional Permian focused players have also come out with plans to cut output over the following months. WPX Energy has elected to cut 30,000 bpd over May and June, which is roughly 25% of its oil volumes. Apart from economic reasons, the company also considers the cost associated with the shut-in and with restoring production, as well as long-term ramifications to the long-term EUR. WPX believes there is an upside that will come from the current situation and that the industry will look much different than it does today in a good way, with strong companies becoming even stronger and the sector becoming healthier as a whole.
Occidental Petroleum is forecasting about 45,000 barrels of oil equivalent per day (boepd) of voluntary cuts in May and 75,000 boepd in June. About a third of that will come from its US portfolio, indicating around 15,500 bpd oil curtailment for May and 26,000 bpd in June. The guidance does not account for shut-ins related to flow constraints and includes about 9% of the total well count being shut because of low economics.
Pure-Permian player Centennial Resource Development is cutting its oil output by 40% in May and June as a result of weaker realized prices, and will monitor the market and adjust its current strategy on a month-by-month basis. Apache has shut in about 2,500 higher cost wells which cumulatively produce around 7,500 bpd. The company is confident that it can bring these wells back online in a timely manner should prices improve. At the same time, Cimarex Energy (XEC) has decreased its estimate for the cut. While the company previously guided a 30% reduction in May, it is now cutting just 20% as a result of higher demand for oil from the marketing side than previously expected. June is looking very promising for XEC and it expects to bring most production back if the price environment does not change.
Finally, several producers including Hess, Laredo Petroleum, and Marathon Oil said that, as of now, they do not plan to curtail production in the next few months. Hess specified that, in order to maximize the value of production, it has chartered three Very Large Crude Carriers (VLCC) and plans to store two million barrels of Bakken crude on each in May, June and July, with plans to sell these barrels in the fourth quarter. Thus, the company does not expect to shut in any operated production due to strong marketing arrangements and VLCC storage.
Laredo Petroleum (LPI) highlighted that it has already shut 205 older wells since 2014 and no longer has an inventory of older uneconomic vertical wells that need to be shut under current market conditions. LPI also mentioned that it will not have to curtail any volumes due to third party constraints. In addition, Marathon Oil mentioned that it has so far curtailed very little production and has the capacity to cut up to 25,000 bpd if needed, but this will be evaluated on an ongoing basis. The operator does not see the need for it at present. Murphy Oil has indicated that it would not have had to shut in any production if the current prices had been a reality when the decision to shut in was made. However, it needs current prices to persist. Since future is uncertain, it is holding on to its previous decision to shut about 21% (6,400 bpd) of its output in May and June.
In total, pure-Permian and Permian focused producers are driving 42% of oil curtailments expected in June, as a high share of analyzed companies are focused in the Permian Basin. Diversified producers with activities spread across multiple plays are following close behind, with a 35% share. About half of their portfolio is represented by the Permian Delaware and Eagle Ford plays. Bakken-focused operators cover 18% of the cuts, with the rest spread among Niobrara/PRB Tight and Eagle Ford producers.
Overall, we estimate the analyzed producers will cut around 835,000 bpd of net US Land oil output in May and 877,000 bpd in June, compared to around 256,000 bpd in April. Grossing up for estimated royalties, that amounts to 1.05 million bpd in May and over 1.1 million bpd in June. If we add NGL into the picture, we get at least around 1.43 million bpd in May and 1.5 million bpd in June of total gross liquids output curtailed. In addition, private operators and smaller players that have not been covered by our analysis could be affected to a greater extent, with most of their production having to be shut over the next two months. Therefore, the actual decline in US shale gross liquids output could easily reach 2 million bpd in June 2020.
The curtailments will be delivered through a combination of measures including deferral of POP wells, shut-ins of higher-cost wells and partial reduction of output from other selected wells. Economic and technical considerations, as well as leasehold obligations, will be key factors for the companies to consider when deciding to cut back on production. We are continuously monitoring company communications and will provide a timely update should operators start revising earlier forecasted cuts.