How U.S. Shale Firms Are Bracing For Saudi Price War

Nov 18, 2014

After unlocking once-unobtainable energy reserves with hydraulic fracturing, U.S. shale companies must pull off another difficult feat: enduring lower oil and stock prices while reassuring investors used to strong returns that the future is still bright.

 

So far, companies are optimistic — and, in the case of Continental Resources, bullish — on oil prices even as they have stopped new projects in Colorado, North Dakota and Texas.

 

The scaled-back expansion plans appear to be a victory for Saudi Arabia, whose price war with U.S. producers has helped sink crude futures more than 25% since June.

 

 U.S. benchmark prices settled at $78.65 a barrel on Friday.

 

 Continental CEO Harold Hamm remains defiant and called the Organization of the Petroleum Exporting Countries, whose dominant producer is Saudi Arabia, a "toothless tiger."

 

 "What we’re dealing with here is a renaissance (that) is going to be very long-lasting here in the U.S.," Hamm said in a conference call. "And we see OPEC worried about that and want to slow down what we’re doing over here."

 

 The company, a pioneer in the massive Bakken shale play, sees a cooling-off period as a good thing for everybody and won’t add drilling rigs next year.

 

 Slower growth in its operations will be an opportunity to improve efficiencies, while a slowdown in oil production should give world demand a chance to catch up, preventing oversupply, Hamm said.

 

 Continental has even scrapped its hedge positions, betting prices will soon rise to the mid-$80s/ lower-$90s range.

 

Analysts disagree on the exact point at which low oil prices will make drilling in shale formations unprofitable. The International Energy Agency estimates the vast majority of shale oil production is robust at $80 a barrel.

 

A more bearish view comes from Sanford C. Bernstein & Co., which estimated last month that one-third of U.S. shale oil production is uneconomical at that price. But it stressed, "We continue to believe we are near the bottom of the oil price cycle."

 

Indications that OPEC is likely to lower its output ceiling if prices fall to $70 per barrel seems to bolster that view. Crude already is trading at its lowest levels in several years, sparking near panic among OPEC member Venezuela. The cartel is scheduled to meet in Vienna on Nov. 27.

 

In the U.S., output may not fall but looks to expand less briskly.

 

Announcing its third-quarter results, Sanchez Energy slashed its 2015 capital spending forecast to $850 million-$900 million from a prior outlook of $1.1 billion-$1.2 billion, citing lower oil prices.

Source: Investors.com