Joe Carroll and David Wethe (c) 2014, Bloomberg News.
HOUSTON — U.S. energy companies are shrugging off a 24 percent plunge in oil prices, confident they can adapt and still make money.
Amid predictions that the biggest drop in crude prices since the global financial crisis six years ago will choke off cash flow and slow drilling, industry leaders are reassuring investors they still have the means to return ample profits. Improved technology is bringing down costs and most shale producers operate in multiple basins, allowing them to shift work to the most profitable sites.
The industry is used to price swings, Halliburton Co. Chairman and Chief Executive Officer David Lesar said in an interview in his Houston office. When prices climb above $100 a barrel, oil companies are “printing money like crazy,” he said. When prices fall below $80, the “doomsdayers start to come out.
”If it floats between $80 and $100, our sector will be fine,” said Lesar, who leads the world’s biggest provider of fracking services to oil companies. ”That’s a range that the service industry and our customers can easily live within.”
Oil futures traded in New York lost one-quarter of their value since June 20. The four-month plunge is the longest streak of consecutive monthly declines since July 2008-January 2009. The futures fell one penny Monday to $81, after earlier touching $79.44.
The oil industry already has demonstrated it can generate solid profit at lower prices. The last time New York crude futures dipped below $80 was June 2012, in a quarter when Chevron, Occidental Petroleum and Royal Dutch Shell reported returns on capital between 13 percent and 16 percent, according to data compiled by Bloomberg.
“We think there’s a lot of economic oil at $75, economic meaning we earn 15 percent, 16 percent, 17 percent returns,” Occidental Chief Executive Officer Stephen Chazen said during a conference call with analysts Oct. 23. “Do I think there’s a lot of economic oil at $50? No, I don’t.”
Harold Hamm, the Oklahoma billionaire who built his fortune by drilling sideways and using hydraulic fracturing to pull oil from North Dakota shale fields, said prices could fall another $30 a barrel before he’d start worrying.
“We can produce down to $50 a barrel,” said Hamm in an interview.
Energy stocks have slumped as well. The Standard and Poor’s 500 Energy Index of 43 companies has declined 16 percent since June 20, when crude reached a 2014 peak of $107.73. The worst performer was Nabors Industries Ltd., an onshore driller.
When rampant shale drilling flooded the United States with more natural gas than factories, furnaces and power plants could burn, prices plummeted, reaching a decade-low of less than $2 per million British thermal units in April 2012. Gas producers’ profit disappeared, with the two largest pure-play domestic gas suppliers, Chesapeake Energy Corp. and Southwestern Energy Co., losing a combined average of $4 million a day that year.
The oil downturn will take a different course, predicted several CEOs.
“Most of the businesses continue to look positive in the near-term to intermediate-term, notwithstanding the current oil price environment,” Anthony Petrello, chairman and CEO of Hamilton, Bermuda-based Nabors, said during an Oct. 22 conference call. “At the current oil price, we do not see a material change in current activity levels.”
The market decline has further to go, according to Goldman Sachs, which Monday cut its estimate for first- quarter 2015 U.S. crude to an average $75 a barrel. The price will sink to $70 in the second quarter, when the glut reaches its zenith.
Shale explorers may be the first to feel the pinch of lower prices because one-third of U.S. formations are money-losers when crude is below $80, said Sanford C. Bernstein & Co. analysts led by Bob Brackett.
Because shale producers depend on constant drilling to expand production, they can adapt more quickly to market changes, said Deutsche Bank strategists including Michael Lewis, whose forecast for production in 2015 isn’t changing. There’s a wide variance in costs among shale fields, giving companies a choice where to spend their money.
At $70 oil, “we expect that producers will choose to reallocate this investment towards more promising acreage and away from higher-cost regions, largely canceling out any change to production growth,” said Lewis and his team.
Some of the best operators can profit at far lower prices because they’re learning how to drill wells more efficiently, getting more production at lower costs with more accurate fracking, better targeting of the juiciest spots in the rock, and spacing wells more closely together.
For example, in Texas’s Eagle Ford Shale formation, SM Energy Co. is getting 40 percent higher production for a 10 percent increase in the cost of each well. Carrizo Oil & Gas Inc., which specializes in Eagle Ford wells, nearly doubled its cash-flow per barrel to $43.86 in the second quarter, compared to two years before.
EOG Resources Inc. boosted cash margins per barrel to $43.31 in the second quarter, up from $34.11 two years before, according to a company presentation.
A Wells Fargo & Co. analysis of three unidentified Eagle Ford operators found they would be profitable above $46 a barrel.
On average, Eagle Ford oil producers need prices around $68 a barrel to make drilling worthwhile, according to ITG Investment Research, a New York-based portfolio manager and investment researcher. In the Bakken and Permian formations, break-even prices are $67 and $65, respectively.
On the other end of the range are the Cana Woodford shale in Oklahoma, where producers need $100 to make a profit, and the Anadarko formation on the Texas-Oklahoma border, where $79 is the threshold, according to ITG.
If prices drop lower and stay there into next year, providers of drilling services and oilfield gear will need to cut prices to retain customers — moves that will help preserve oil company margins, said Occidental’s Chazen.
Husky Energy Inc., while feeling more pain from lower prices in its costlier oil sands production, is still generating returns in the “low teens” at its other oil projects because of conservative planning, CEO Asim Ghosh said during an Oct. 23 conference call.
“We cut our coat to the cloth that’s available,” Ghosh said. “Times like this call for prudence and focus.”
— Carroll reported from Chicago. Contributors: Eliot Caroom and Isaac Arnsdorf in New York, Rebecca Penty in Calgary and Bradley Olson in Houston.