Shale drillers are noticeably tapping the brakes on their activities in light of weaker-than-expected oil prices this year. This past week, several more U.S. oil and gas producers unveiled spending cuts and activity reductions when they announced second-quarter results. But worth noting about these latest plan modifications is that, thanks to drilling efficiency gains and improving well productivity, these cutbacks won't have much, if any, impact on production in the near term.
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Diversified shale driller Marathon Oil (NYSE: MRO) announced one of the larger budget cuts this week after saying that it only plans to spend $2.1 billion to $2.2 billion this year, which is down from its initial budget of $2.4 billion, or about 10% lower at the midpoint. One of the factors driving the decision to cut spending is that Marathon based its budget on oil averaging $55 per barrel this year, which hasn't been the case. However, another factor behind the budget reduction is that Marathon doesn't need to spend that capital to meet its full-year production growth target because its wells have outperformed expectations. In fact, Marathon now expects to exit the year producing 23% to 27% more on a barrel of oil equivalent basis from its U.S. resource plays than it was at the end of last year, which is above its prior estimate of 20% to 25% output growth.
Devon Energy (NYSE: DVN) unveiled a similar shift in its outlook when it reported second-quarter results this week. The diversified oil and gas giant trimmed $100 million off its spending range, bringing it down to $1.9 billion-$2.2 billion. However, despite the reduction in spending Devon Energy stated that its 2017 exit rate for oil production in the U.S. would be 18% to 23% above where it entered the year. That's up from the 13% to 17% year-over-year increase that Devon initially expected. Driving the improved growth outlook is the fact that not only has its latest wells performed exceptionally well, but the company has undertaken innovative initiatives that have completely offset inflation across its supply chain.
Permian Basin-focused driller Pioneer Natural Resources (NYSE: PXD) also announced that it was trimming its budget by $100 million, bringing it down to $2.3 billion. Driving that decision were some unforeseen drilling delays that put it behind schedule. While Pioneer could have made up those completions by accelerating its efforts, it chose to defer them into 2018 given where oil is these days. One of the results of this decision is that Pioneer's production will only increase 15% to 16% this year, which is at the lower end of its initial 15% to 18% guidance range.
Cautious but not cutting yet
Meanwhile, Chesapeake Energy (NYSE: CHK) said that it was "actively managing" its 2017 capital program by shifting money toward its highest-return opportunities and reducing spending in other areas. As a result, Chesapeake will cut its rig count from 18 to 14 while also reducing the number of wells it places into service over the back half of the year. That said, the company still expects to spend between $1.9 billion to $2.3 billion on drilling and completing wells this year, which should result in 0% to 4% production growth versus last year.
Apache (NYSE: APA), likewise, is keeping its 2017 budget intact at $3.1 billion due in part to the fact that the company based its spending level on $50 oil. Furthermore, the company recently sold its Canadian assets, which will increase its cash position, though it will cause production to come in below its initial forecast. But the company is growing more cautious on planned spending for next year, which it set at $3.1 billion after adjusting for its Canadian sale. One concern is that it needs oil to average $55 a barrel in 2018 to finance this plan. Given that requirement, CEO Jon Christmann noted that "we are well prepared to manage a capital program commensurate with the prevailing price environment without stressing the balance sheet or diluting our shareholders." In other words, it will cut spending if necessary to protect the business, but it's not worried just yet.
Cutting because we can, not because we must
The one common theme is that these companies are slowing their activity rates because it makes sense to do so in the current environment. In many cases, it's because they're so far ahead of pace this year thanks to improving well productivity and efficiency gains that they don't need to spend as much money to hit their targets. Instead, they're holding back that capital for when prices improve, which should fuel better returns for their investors over the long run.
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