To drill or not to drill

Things clearly aren’t good when the chief executive of the world’s biggest independent oil and gas producer has to include assurances about his company’s operations and outlook in their earnings call.

“Rest assured ConocoPhillips is laser focused on the things we can control,” chief executive Ryan Lance said.

But Lance’s comments capture the unclear oil market outlook the industry, particularly independent US producers, is grappling with. It also reflects the quandary they are in: Each new barrel they pump brings cash to repay debt and fund drilling, but also adds to the growing supply glut. Benchmark US WTI futures are down by half from year ago levels at around $45/bl. 

Almost all US oil producers such as Occidental, Hess, Anadarko and Continental who have reported their second-quarter earnings have raised their output guidance for this year. Better-than-expected drop in costs of services and improvements in efficiency have allowed them to spend less to produce more.

The risk of raising output is serious when the warning comes from none other than an industry leader like Chevron. “We have seen obviously much stronger production coming out of the US and with the ingenuity and cost efficiencies of the US industry we have seen costs continue to fall and economics of those barrels continue to rise,” Chevron’s chief financial officer Patt Yarrington said. “And so that puts more supply onto the market.”

The US major took a non-cash impairment of $1.96bn and $670mn in charges for lowering its long-term price outlook, to an undisclosed number, in part because of oversupply.

Among the mid to large US independents, only EOG Resources seems to agree with Chevron so far, and has ruled out a production boost. “The company is choosing to refrain from growing oil production into an over-supplied market,” EOG said in an earnings statement. “EOG’s focus in 2015 is on capital efficiency to improve returns and quickly transition the company to be successful in a lower commodity price environment.”

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