Some American oil producers may be pumping the brakes on new drilling, but as the leading shale players get set to report earnings this week, investors will be watching closely to see how much the industry is really slowing its ambitious plans for growth.
Investors and analysts are eager to hear management teams at Pioneer Natural Resources Co., EOG Resources Inc. and other shale companies detail their plans for the second half of 2017.
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Anadarko Petroleum Corp. and ConocoPhillips already reported and could serve as bellwethers for this earnings season. They lost more than expected in the second quarter as crude languished under $50 a barrel for most of the period, prompting them to announce plans to rein in spending. Together, they shaved a combined $500 million out of their $9.2 billion budgets.
Investors, initially skeptical, came around to the idea of belt tightening -- when they learned where it was happening. Anadarko's stock dropped 3% in overnight trade last Monday after its cuts were announced. But the stock rallied back Tuesday morning when Chief Executive Al Walker and other executives explained that the preponderance of cuts would cut from international and deep-water divisions, not U.S. shale operations.
In fact, Anadarko is in the process of restarting 3,000 wells in Colorado shale country that shut in the wake of a deadly home explosion in the spring.
"We're going to continue to watch the market, see what oil prices do, try to pace our spending this year and next year," Mr. Walker said.
ConocoPhillips said it is now track to end the year with less than $20 billion in debt thanks to extensive oil-and-gas field sales in Canada and the natural-gas-rich Barnett Shale near Fort Worth, Tex. The company is dialing down spending for the rest of this year by $200 million, but continues to ramp up in oily areas like the Eagle Ford shale of South Texas. Conoco shares rose 6% last week.
While enthusiasm for shale hasn't waned, investors are more wary of companies that want to increase production at any cost, said Dan Pickering, head of the asset-management arm of investment bank Tudor, Pickering Holt & Co.
"The market is signaling spending less is OK," he said. "The market is very afraid of U.S. oversupply."
U.S. oil drillers have redeployed more than 240 rigs since the start of the year, but those increases are slowing dramatically. The second quarter rig count was only 23% higher than the first quarter, and so far in July it is up just 5% over the second quarter, according to a report from RigData.
Even if U.S. energy outfits take a break from drilling, oil production is likely to keep rising. That is because many producers in the Permian Basin of West Texas and New Mexico have hedging contracts on 65% of their production for the rest of this year at $50 a barrel, ensuring they will get that price even if crude trades lower, according to a new analysis from IHS Markit Ltd.
Also, many wells around Texas have been drilled but not yet fracked, the so-called completion stage that unlocks fuel from the ground. According to the latest federal estimate, the number of drilled-but-uncompleted wells is now over 6,000 -- a backlog that could take the next 18 months to work off as wells are hooked up to pipelines, analyst James West of Evercore ISI said.
Pioneer, which reports Tuesday, expects to drill its 1,000th well in the Permian later this year as it charts of path to pump 1 million barrels a day in a decade, up from a little more than 235,000 barrels a day in 2016.
Pioneer executives have long been bullish on U.S. shale despite low oil prices, in part because the company has hedged much of its production to get higher-than-market prices, but also because the company continues to wring out costs from its operations.
But even Pioneer has signaled its outlook for this year and next could be tempered if low oil prices persist -- an idea that is getting more traction since the head of Royal Dutch Shell PLC last week warned that oil prices might be "lower forever."
"We're not going to drill ourselves into oblivion," Tim Dove, chief executive of Pioneer, said in late June at an energy conference hosted by J.P. Morgan. "It just doesn't make sense."
Bradley Olson contributed to this article.
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(END) Dow Jones Newswires
July 30, 2017 07:14 ET (11:14 GMT)