Eyes turn to a rebound

After being caught between high service costs and plunging crude prices for more than 9 months, some US shale producers are starting to think about that inevitable rebound.

A 50pc plunge in crude prices saw companies such as the world’s largest independent oil and gas producer ConocoPhillips, and others like Occidental and Hess, post losses in the fourth quarter. 

That prompted almost all shale producers to hunker down by sharply lowering their spending, reducing rig count and focusing only on areas that offer the best returns. But just as there are two sides to a coin, the sharp pullback will have both a negative and a positive outcome.

The negative impact, not surprising, is a steep fall in US oil output growth, which will further eat into the companies’ earnings. Growth will trickle to just 120,000 b/d in the fourth quarter, versus an “astonishing” 1.5mn-1.6mn b/d increase in December and January, according to Goldman Sachs.

But that will also lower demand for rigs, crews and chemicals. As a result, oil exploration costs are expected to fall by a third, according to consultancy Wood Mackenzie, which expects drillers to cut their 2015 budgets by an average of 30pc.

Those lower costs will set the stage for a recovery in 2016 as “explorers seize their chance to drill at lower costs,” WoodMac said. Producers will enjoy only about half of those lower costs in 2015 as contracts unwind and operators take time to adopt new practices. “Deflation at this rate could allow any companies that hold spending flat into 2016 to fund 50pc more exploration versus 2014,” it said.

And early signs of the turnaround may already be appearing. While the US rig count fell for the 17th straight week last week, the pace at which drillers idled rigs was the slowest so far this year, according to data from oil field services company Baker Hughes. The rig count fell by just 21 in the last full week of March, and by just 20 last week. That could be a pointer to operators responding to lower service costs and other incentives to keep drilling.

Pioneer Natural Resources is already thinking about a return to a growth mode from the second half of this year, investment bank Simmons & Company said following a meeting with the management. Pioneer told the bank it is looking at growing its rig count in the Permian in Texas from 10 currently to 25 by early 2016, with the decision hinging in part on an improving macro environment.

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