Shale's response to low oil price environment- summary of 2015 and outlook of 2016

February 15, 2016

Authors: Per Magnus Nysveen, Senior Partner & Head of Analysis, and Leslie Wei, Senior Analyst, Rystad Energy

Publisher: Oil & Gas Financial Journal, February Edition

Oil prices continued to drop during the fourth quarter as global oil supply and demand trends point to a continued over-supplied market in 2016. As operators begin to report the 2016 capital budget, total shale investments are expected to decline by an additional 20% next year and production is expected to remain flat.

To further analyze the impact of lower oil prices on North American shale production, a peer group of ~30 companies has been created. The companies are selected based on the following criteria: US focused, oil focused, and size/level of shale activities. The peer group* accounts for 50% of current US shale investment activity as well as 50% of current shale oil production. Figure 1 compares the aggregated quarterly oil production to the quarterly capital expenditures. For the peer group, capital expenditures peaked in Q4 2014 with spending of $31 billion. Since then investments have dropped by 46% to $17 billion in Q3 2015. Over the same time period, the reported oil production has stayed relatively flat at 3.7 million bbl/d. The year-over-year oil production growth in Q3 2015 was 300 kbbl/d, while the quarter-over-quarter production was down 10 kbbl/d. To reiterate previous articles, strong production figures can be attributed to reduced DUC inventory (ref October 2015 article), better well results (ref December 2015 article) and high grading of crews, equipment and locations.

*The peer group consists of: Anadarko, Antero Resources, Chesapeake Energy, Cimarex Energy, Concho Resources, ConocoPhillips, Continental Resources, Devon Energy, Encana, EOG Resources, EQT Corporation, Halcón Resources, Laredo Petroleum, Marathon Oil, Murphy Oil, Newfield Exploration, Noble Energy, Oasis Petroleum, Oxy, Parsley Energy, Pioneer Natural Resources, QEP Resources, Sandridge Energy, Southwestern Energy, Whiting Petroleum, Carrizo Oil & Gas, EP Energy, Sanchez Energy, SM Energy and WPX Energy.

Balancing cash flows is a priority for U.S. shale companies. Figure 2 shows the reported quarterly cash flow breakdown for the peer group on a corporate level for 2014 and 2015. During the first quarter of 2015, operations generated cash flows of $12 billion for the peer group, while investments were $27 billion. The deficit in this period was primarily covered by raising of cash through equity. Since then the companies have worked on improving their cash flow, primarily by reducing activity. Capex has dropped from $27 billion in Q1 2015 to $17 billion in Q3 2015, a reduction of ~40%. In Q3 2015 Cash Flow before Financing was -$3 billion and the “funding gap” was not closed entirely by financing. The companies raised $1.9 billion cash in the form of equity and debt.

We find the peer group will manage to balance cash flow and production early 2016 as long as WTI stays above 40 USD/bbl. Table 1 shows the total North American 2016 production and capex growth highlighting the main plays. Rystad Energy’s 2016 estimates indicate a drop in total spending of 20%. Eagle Ford and Bakken are expected to fall the most in terms of activity, while Permian Delaware will be more resilient. As a result of the lower activity, the strong production growth from the last five years is expected to come to a halt in 2016.

Table 1: North American shale supply and drilling and completion cost (D&C) Source: Rystad Energy NASReport. Assumes no growth in DUCs.

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Article Contacts

Per Magnus Nysveen, Senior Partner & Head of Analysis

Phone: +47 24 00 42 16

Mobile: +47 99 16 13 09

per@rystadenergy.com

Leslie Wei, Senior Analyst

Phone: +47 24 00 42 00

Mobile: +47 90 22 00 76

leslie.wei@rystadenergy.com

About Rystad Energy

Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.

Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), Africa as well as South East Asia.