North America's leading independent oil and gas producers reported large losses in the second quarter despite cutting costs and increasing output.
Ten of the largest independent oil and gas producers in the United States reported total losses of almost $15 billion between April and June, compared with profits of almost $3.5 billion a year earlier.
Three more independents remained profitable, but reported net income of only $66 million, down from more than $1 billion in the second quarter of 2014.
Of the 13 companies in the sample, 11 had increased production compared with the prior year, in some cases by 30 percent or more.
Most firms reported they had been able to reduce the average cost of drilling and completing each well by about 20 percent compared with the end of 2014.
Average output per well has been boosted by pulling rigs back to the most consistently productive areas of the major shale plays.
And the time needed to drill each well, stimulate it by pressure pumping and fix the wellhead equipment has been cut sharply by getting crews to focus on drilling the same formations over and over again.
In the Spraberry Trend, part of the Permian Basin in west Texas, Pioneer Resources has cut the time between spudding a new well and putting it into production to 25 days, the company told analysts on Aug. 5.
Other shale producers report similar cost reductions and improvements in efficiency by standardising drilling and completion operations as much as possible.
And the number of risky extension and wildcat wells has been reduced in favour of closely spaced development wells in the heart of existing shale plays to maximise production.
But despite the improved efficiency, producers struggled to keep pace with the 44 percent drop in U.S. oil prices, from $103 to $58 a barrel, and the 40 percent fall in natural gas prices, from $4.58 per million British thermal units to $2.73, between the second quarter of 2014 and the second quarter of 2015.
Continental Resources, one of the biggest producers in North Dakota, told analysts it was cash-flow positive in June with an average WTI price of $59.83, and would be cash-flow neutral in the second half of 2015 if WTI stayed at $60.
The problem is that WTI has now sunk to an average of less than $49.50 so far in the third quarter and is currently at $43.
Most producers are confident they can squeeze costs and improve efficiency further, but it is getting harder to outrun the fall in prices, and the entire sector is on course to report more losses for the third quarter.
Producer EOG Resources, which was one of the few independent oil and gas companies to remain profitable between April and June, albeit barely, and has some of the most promising acreage and greatest efficiencies, says it can achieve a 30 percent after-tax return at $50.
But EOG has told investors it is focused on improving returns rather than growing production. "We do not want to grow production until we see the oil market is firmly rebalancing," EOG Chief Executive Bill Thomas said on Aug. 7.
"We're not inclined to grow production in a continued low-price environment," the company's chief operating officer, Gary Thomas, confirmed.
The company believes current oil prices are not sustainable and the market will rebalance fairly quickly as a result of strong fuel demand and slowing U.S. production growth.
"We do a lot of work and a lot of study on the process and we particularly model what everybody is saying in the U.S. and what they're going to be doing in the second half of this year through their guidance," EOG's chief executive explained.
"We really believe that in the second half of this year we are going to see some strong month-over-month decline rates."
It might take a couple of months for declines to become evident, given the two-month delay in reporting, but EOG expects output to fall in July and August, which should be reported in September and October.
The company expects U.S. shale output to continue declining in 2016 if oil prices remain at current levels and to be coupled with reductions in other non-OPEC supplies.
The company is deferring capital spending as much as possible to wait for evidence of rebalancing and an upturn in prices.
"We just can't see a good business reason to outspend growing oil in an oversupplied oil market. This just does not make sense to us," the CEO told analysts.
EOG's forecast that U.S. shale production is peaking and set to fall in the second half of the year gets some support from data published by the U.S. Energy Information Administration.
U.S. crude oil output was flat in April and fell by 180,000 barrels per day in May, the largest decline in almost four years, according to the EIA's latest estimates.
The estimates are subject to considerable uncertainty, but the EIA, EOG and Continental Resources have all forecast production will decline in the second half of the year.
However, many independent analysts have forecast prices need to remain low for much longer to force shale producers to scale back their output sufficiently to eliminate the oversupply, and that any rebalancing will not be completed until 2017.
The question of whether production is actually peaking is an empirical one and should be resolved within the next couple of months.
But with most of the shale sector now making losses, which appear set to worsen in the third quarter, current prices look unsustainable.
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