Top US Shale Producer Betting on Oil Price Hike to Expand Drilling

Wednesday, 6th May 2015
Top US Shale Producer Betting on Oil Price Hike to Expand Drilling
EOG Resources Inc., the biggest shale producer in the U.S., will increase drilling activity as soon as oil prices stabilize at $65, anticipating a six-week long price rally will continue through the end of the year.The price of West Texas Intermediate, a U.S. benchmark, today passed $60 for the first time this year on speculation the supply glut was easing. Drillers have cut rigs to a five-year low after prices fell by more than half since June, spurring billions in spending cuts and more than 100,000 industry job losses.
Chairman and Chief Executive Officer William Thomas joins Pioneer Natural Resources Co. in preparing for a return to growth after the biggest oil price crash since 2009. Pioneer said Tuesday it’s planning to add drilling rigs starting in July, subject to market conditions and the sale of other assets.

EOG will be “heading into 2016 on a very strong note,” Thomas told investors on a call. EOG plans to boost output in the fourth quarter and double-digit growth could return by 2016.

Other major shale companies are weighing when the time will be right, said Ed Hirs, a lecturer on energy economics at the University of Houston.

“EOG is a tremendous technical company,” said Hirs, who runs his own small oil production firm. “EOG, Pioneer and others have plenty of opportunities. They are looking ahead to the inevitable and are deciding to get ready.”

Prior to today’s comments, Houston-based EOG had slashed spending almost 40% from last year’s level, cutting the number of rigs drilling for oil and natural gas from 32 to 18 in two of its three core areas.

Initially, EOG will grow by completing wells as soon as the third quarter, Thomas said. Shale producers have left thousands of wells essentially half-finished, waiting for prices to rebound before they frack them, according to Bloomberg Intelligence. EOG will make that decision by July.

“They are managing growth,” said Fadel Gheit, an analyst with Oppenheimer & Co. in New York. Prices have rebounded faster than many anticipated, rising more than 30% in the past six weeks, and EOG as well as other companies seem to be waiting to make sure the rally holds, he said.

Hedge fund manager David Einhorn on Monday criticized shale companies including EOG, saying many didn’t generate free cash flow when oil was trading above $100 a barrel last year. They haven’t adjusted to the new reality of oil at almost half of last year’s prices, he said.

Earnings at major independent oil companies have been poor for the first quarter. Anadarko Petroleum Corp. reported its biggest loss in more than a decade largely due to a $3.7 billion writedown from one gas field in Utah. EOG on Monday reported a $169.7 million net loss for the first quarter, its first negative results in more than two years.

EOG didn’t respond to Einhorn’s comments in the earnings conference call today. The shares fell 4.9% to $94.54 at the close in New York. Investors were hoping for an even stronger drilling response to the oil price rally, Gheit said.

EOG, which operates predominantly in South and West Texas, the Rocky Mountains and in North Dakota’s Bakken formation, has said it can turn a 30% profit even with crude prices of about $55 a barrel.

“We don’t want to get in a hurry,” Thomas said. “We don’t want to jump-start completions” and then see the price fall. EOG will be “heading into 2016 on a very strong note.”

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