U.S. oil production is set to fall this year as drastic drilling cutbacks take hold faster than world governments expected, according to the biggest, fastest-growing shale company.
EOG Resources Inc.’s forecast contradicts most estimates that see U.S. production rising, including those by the U.S. Energy Information Administration and the International Energy Agency. The company said the crude market would rebound quickly and labeled the current downturn a “short cycle.”
The Texas producer said its own production would bottom in the second and third quarter, resulting in output remaining unchanged for the year compared to last year’s breakneck pace of growth. The deciding factor in what has been viewed as a price war with Saudi Arabia and its OPEC allies is how many of the thousands of U.S. producers will follow suit.
“EOG is viewed as the premier company in shale development, and if they’re not going to grow, it is a very important signal to the market,” said Michael Scialla, a Denver-based analyst at Stifel Nicolaus & Co. “The argument that this slowdown is going to take a while to have an impact on supply is completely wrong.”
So far company response has been mixed as some producers focus on preserving cash flow to fund their operations. Others are insulated from the effect of the market crash by hedging contracts that locked in a higher price for some of their production in 2015.
Noble Energy Inc., Devon Energy Corp. and Marathon Oil Corp., three other companies with significant shale operations, said they will boost output this year. More than half of Devon’s 2015 oil production is hedged at a price of $90.75 a barrel. Apache Corp. plans to pump about the same volume of oil as last year.
Meanwhile, Saudi Arabia is boosting production in a bid to maintain market share. Crude oil output is about 10 million barrels a day, New York-based Pira Energy Group said in a weekly report, citing discussions with Saudi customers. That would be the highest since July and up from an average of 9.7 million barrels a day in the second half of 2014, according to data from the Joint Organisations Data Initiative, an industry group supervised by the Riyadh-based International Energy Forum.
U.S. oil prices fell 1.8 percent to $51.18 a barrel at 1:37 p.m. in New York on Saudi Arabia’s output and estimates that U.S. inventories this month continue to rise. The average price for Brent crude, the benchmark used by most of the world, dropped 30 percent from a year earlier in the fourth quarter, to $77.07 a barrel.
Crude prices had rallied in recent weeks to more than $50 a barrel as the pace of U.S. cuts surprised market analysts. The number of oil-drilling rigs working onshore, which has declined by a third since October, is likely to level off in August at about 1,000, causing prices to recover for the year, according to Wood Mackenzie, a global oil consultant.
EOG Chairman and Chief Executive Officer William R. Thomas plans to slash spending 40 percent this year and reduce the number of completed wells by almost half compared to 2014. EOG has increased its oil output by about 50 percent annually since 2009.
EOG fell 2.1 percent to $93.30 in New York. Shares declined more than 6 percent late Wednesday after the company reported fourth-quarter profit that missed expectations. They are up 1.3 percent this year.
EOG is the dominant producer in Texas’s prolific Eagle Ford formation, acquiring a reputation in the industry as a pioneering shale company that has improved efficiency. EOG’s wells have among the lowest costs in the industry as it has honed techniques to draw out higher volumes of oil than peers after completing a well.
The scale of cutbacks across the industry will be enough to prevent U.S. production from growing and may lead it to fall by the end of the year, Thomas said Thursday on a conference call with investors.
“We do not think it’s wise or prudent to accelerate oil when oil prices are low, especially when the rebound in price could come this year or maybe even next year,” Thomas said.
The reductions come as agencies such as the U.S. Energy Information Administration forecast that overall domestic production will grow 7.8 percent to 9.3 million barrels of crude a day this year, adding to the glut that’s pushed down prices.
The collapse of oil prices by more than half since June has forced major producers and drillers to cut more than $40 billion in spending and fire 50,000 workers.
The ability of shale producers to halt production should “help the market regain equilibrium,” Bob Brackett, an analyst at Sanford C. Bernstein & Co., said in a Wednesday note to investors. “If the most successful player doesn’t grow in 2015, what does that imply about marginal operators?”
EOG’s net income fell to $444.6 million, or 81 cents a share, from $580 million, or $1.06, a year earlier. Profit excluding one-time items was 79 cents a share, less than the $1 average of 36 analysts’ estimates compiled by Bloomberg.