Oil Producers Cast Aside Gloom as Rally Spurs Drilling Plans

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Oil producers battered by the steepest market collapse in a generation are signaling for the first time that they believe the worst is behind them.

Carrizo Oil & Gas Inc., Devon Energy Corp. and Chesapeake Energy Corp. all lifted their full-year production outlooks this week. Shale explorer EOG Resources Inc. said on Tuesday it plans to increase drilling as soon as crude stabilizes around $65 a barrel, while Pioneer Natural Resources Co. has said it is preparing to deploy more rigs as soon as July.

The actions come amid a seven-week rally that’s boosted oil prices by 39 percent. They follow 10 months of dramatic cost-cutting and revamped drilling strategies that have created a new reality for some within the industry. As prices rapidly fell, a $60 price for oil looked like a death sentence. Now, with the cutbacks, it appears positively rosy.

“We didn’t think we’d be quite this good,” Stephen Chazen, Occidental Petroleum Corp.’s chief executive officer, said in an analyst call on Wednesday. The company expects to boost production as much as 14 percent this year, he said, compared to a previous forecast for 6.8 percent to 10 percent growth.

The danger, of course, is that a production surge by newly optimistic U.S. oil explorers will flood the market with excess crude and force prices back down to the $43 level seen in March, or worse.

Volatility Ahead

While some analysts have speculated that a recovery would have an L-shape, settling at one lower price point by the end of the year, oil historian and economist Daniel Yergin has said he believes it will take a W-shape, with continued peaks and valleys as drillers rush out product in times of higher prices, then pull back when they drop.

“That means oil prices are going to be a lot more volatile,” Yergin, the vice chairman of IHS Inc., said last month in an interview. “The notion of a W captures the sense of it. There isn’t going to be a landing place for oil.”

One of the most prominent executives in the international petroleum industry -- Exxon Mobil Corp.’s Rex Tillerson -- has been warning of just such a double dip in oil prices.

Tillerson, who is chairman and CEO of the world’s biggest energy producer by market value, told analysts, investors and fellow executives last month at a Houston energy conference that low prices will persist for years precisely because drillers are so ingenious about finding ways to extract oil profitably.

Even so, companies are gearing up for growth again.

New Normal

“There’s been a lot of talk around the shale patch that $65 or $70 a barrel is the new $100,” said Jim Krane, an energy fellow at Rice University in Houston who has researched the productivity gains of crude producers. “These companies are leaner and meaner and can start to play ball again at a lower price.”

Occidental has shortened the time it takes to drill a well in a layer of Texas’ Permian Basin known as Wolfcamp A by 17 days, and lowered per-well costs by 24 percent to $8.3 million, the company said in an investor presentation on Wednesday.

“Our objective is to continue to grow the volumes through the year, to the extent we can unless you get a collapse in product prices,” Chazen said.

For EOG, $65 oil generates better returns for them now than $95 did two years ago. That’s thanks in part to equipment and drilling fees that have fallen as much as 30 percent in some regions, according to DrillingInfo Inc., a shale data and analytics company.

Finishing Wells

EOG, the largest U.S. shale producer, said it may begin fracking a backlog of hundreds of half-finished wells in the third quarter. Pioneer plans to add two rigs per month starting in July and continue doing so through the end of the year, adding up to $90 million per rig to its annual spending plan.

“We’ve made a great deal of progress in cost reductions and efficiency gains,” Pioneer President Tim Dove said. “We’re getting more confident in our ability to add rigs beginning in the third quarter.”

Some producers are moving cautiously, waiting for the right time to turn up the volume.

“The industry’s positioned to respond well when the conditions are right,” Tim Leach, CEO of Permian-only producer Concho Resources Inc., in a May 5 earnings call. “In some circumstances, we’re backing off the 24-hour-a-day work and just going to daylight work. So you can kind of ramp up the activity without having to add any equipment or people.”

Winners, Losers

In response to falling prices, many producers drilled wells and left them unfracked, anticipating they could reap higher returns by waiting to produce from them when oil prices rebounded later.

“High prices bring a lot of extra production on and low prices sort out the winners from the losers,” Rice University’s Krane said. “They’ve seen costs come down and have been able to squeeze out a lot of efficiency gains. You’re seeing that process play out right now.”

The oil rally will invite higher output in the near term as producers complete wells at lower cost, which could suppress any further price increase, Bloomberg Intelligence analysts Vincent Piazza and Gurpal Dosanjh said Wednesday.

As many as 100 currently-idle horizontal rigs may return to the market by the end of the year, according to a Citigroup Inc. note to investors Wednesday. Although output could fall in the second and third quarters, it may resume growing before the end of the year, the Citigroup analysts said.

“Is this the turning point that the market has been waiting for?” Citigroup commodities analyst Eric Lee said in the note.

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