January Industry Affairs

US Shale Output To Fall 116,000 Bpd mo/mo In Feb.

by  Reuters (Reporting by Scott DiSavino and Catherine Ngai in New York; Editing by Chizu Nomiyama and Grant McCool)

Monday, January 11, 2016

NEW YORK, Jan 11 (Reuters) - U.S. shale oil production is expected to fall for a seventh month in a row in February, declining at about the same rate as the month before as drillers manage to eke out a few more barrels from each new well, U.S. data showed on Monday.

Total output was set to decline by 116,000 bpd to 4.8 million bpd in February compared with January, a U.S. Energy Information Administration's (EIA) drilling productivity report said.  Production was estimated to have fallen by about the same margin in January, despite some expectations that the decline rate would begin to quicken as companies slash spending.

If true, the decline would take U.S. shale output to 638,000 bpd below the March 2015 peak, a far slower drop than many analysts had expected just a few months ago. Shale firms' resilience in the face of crashing crude oil markets has added to the selloff, pushing prices to near 13-year lows this week.  Bakken production from North Dakota and Montana was set to fall 24,000 bpd, while production from the Eagle Ford in South Texas was expected to fall 72,000 bpd.

But some regions were still growing, 18 months into the oil slump. Production was forecast to rise by 5,000 bpd in the Permian Basin in West Texas and eastern New Mexico, the data showed.  The data added to indications that producers were running out of ways to extract more crude from each well, part of the industry's efficiency drive that helped them lower costs and maintain spending.  After surging by dozens of barrels per day for much of 2015, the number of barrels likely to be pumped from a new well in the Bakken would rise by 5 to 724 bpd in February, and rise by 2 bpd in the Permian, the EIA data showed.

Total natural gas output would decline for an eighth consecutive month in February to 43.7 billion cubic feet per day (bcfd), the lowest level since February 2015. That would be down over 0.4 bcfd from January, making it the biggest monthly decline since January 2015, according to the EIA data.  The biggest regional decline was expected to be in the Marcellus formation in Pennsylvania and West Virginia, down 0.2 bcfd to 15.2 bcfd in February, the lowest level of output in the basin since August 2014.  That would be the biggest monthly decline in the Marcellus since March 2014 and would be the eighth monthly decline in a row in gas output for the region.

Saudis failing to drown US with oil: Harold Hamm

CNBC  By Matthew J. Belvedere

January 12, 2016 8:49 AM

There's growing evidence that Saudi Arabia's attempt to flood the crude market at a time of oversupply and concerns about weakening demand is not working, American oil billionaire Harold Hamm said Tuesday.  "We're in a predatory pricing environment. That's what's happened. The Saudis turned 1.8 million barrels on, and basically their intent was to drown us. But they've not got that done. It's been a monumental mistake for them, I might add, a trillion- dollar mistake," the founder and chief of Oklahoma-based Continental Resources (NYSE: CLR) told CNBC's " Squawk Box."

Hamm cited speculation that Saudi Aramco , the state-owned oil giant, may sell at least part of its operations in an initial public offering.  "They're having to sell part of their business to keep doing what they are doing," he said, referring to the refusal by the Saudis to cut production. "They're having to sustain a country. We're sustaining companies here. We cut capex and quit spending money. And ride it out."

Pressure may be mounting on Saudi Arabia from fellow OPEC members, as crude prices continued to trade around 12-year lows Tuesday morning. Nigeria's oil minister said a couple members of OPEC have requested an emergency meeting. But other members said the group won't be gathering to talk about oil prices before their next scheduled meeting in June.

Over the next 12 months, Hamm expects oil prices to nearly double to around the $50 to $60 per barrel range as output, at least in the U.S., abates. "The tipping point is getting back to equilibrium with supply and demand. We see that happening in the back part of the year."

But there's been some question about whether some of the U.S. oil companies can survive until the market stabilizes.  Oppenheimer analyst Fadel Gheit told CNBC on Monday that half of the American shale producers could go bankrupt before crude eventually turns. Gheit also sees equilibrium at around $60 per barrel, but said it could take more than two years to get there.

Hamm said the bankruptcy narrative has been vastly overstated.  "It's a different situation than it was in the 1980s. Most of the companies out there [now] have long term money that's not coming due tomorrow," he said. "They're able to ride this out.  A lot of bankruptcies were predicted early. They're just not happening. We have some of them that have. The weaker companies are folding, maybe, but very few of them," he said.

Devon Strikes Again At Year's End With $2.5 Billion In Buys

DAVID MICHAEL COHEN, PLS INC., HOUSTON

January 12, 2016

THE US UPSTREAM MARKET experienced an upswing in deal activity heading toward year's end, led by $2.5 billion in acquisitions from Devon Energy. Devon gave the deal markets a similar boost toward the end of 2013 when it acquired GeoSouthern's Eagle Ford assets for $6.0 billion, but this time it is upgrading existing positions to become the industry's leading leaseholder in Oklahoma's emerging STACK play and Wyoming's Parkman/Turner play.

In the STACK deal, Devon is acquiring the "best-in-class" assets of privately held Felix Energy for $1.9 billion, marking the third-largest deal this year in the US upstream sector, after Noble Energy's $3.9 billion acquisition of Rosetta Resources and WPX Energy's $2.8 billion RKI E&P buy. Devon estimates it is paying $20,000 per acre for Felix's 80,000-net-acre Woodford and Meramec position after allocating $33,300 per boe/d for 9,000 boe/d in existing production. In 2015's stilted deal market, PLS Inc.'s proprietary valuation analytics indicate that only the "core of the core" of resource plays, heavily weighted to the Permian, have commanded value for undrilled acreage. Examples of Permian acreage values in 2015 include Noble/Rosetta ($12,500/acre), Diamondback/Cobra ($25,000/acre) and Yantai Xinchao/Tall City ($8,500/acre).

Felix's well results demonstrate why the STACK play may be able to compete with the Permian. Almost all of Felix's leasehold is concentrated in the oil window of both the Meramec and the Woodford, de-risked and in full development mode. In an August presentation, Felix touted its 2015 program as consistently achieving IRRs above 40% with its last three wells showing RORs from 35% to 70% based on $50 oil and $3 gas. Its first 13 operated Meramec wells had IP rates averaging 1,341 boe/d (83% liquids) from 1-mile and 2-mile laterals, tracking a 1.36 MMboe EUR (75% liquids).

Nonetheless, Devon CEO Dave Hager said the deal would not have been possible if Devon's midstream MLP affiliate EnLink Midstream wasn't simultaneously agreeing to acquire Midcontinent gathering company Tall Oak Midstream for $1.55 billion. Felix's entire acreage position is dedicated to Tall Oak's gathering and processing assets. "We leveraged the midstream relationship to secure the Felix transaction," Hager said on a conference call. "And the EnLink relationship gave us a strategic advantage in this transaction. We would not have been able to place the value on Felix we did unless EnLink controlled the midstream." Both Felix and Tall Oak are backed by private equity firm EnCap Investments.

The acquisition by EnLink provides an unusually quick turnaround for EnCap's Tall Oak investment. The gathering firm launched in early 2014 with a $100 million initial equity commitment from EnCap Flatrock Midstream, a JV formed in 2008 between EnCap and Flatrock Energy Advisors. That commitment was later increased to $400 million. The company has two gathering and processing systems serving west-central Oklahoma's STACK play and the "Central Northern Oklahoma Woodford" or CNOW play, both supported by long-term, fixed-fee contracts with acreage dedications averaging 15 years. Felix is the largest of Tall Oak's 15 customers.

In Wyoming, Devon is acquiring 253,000 net acres in the Parkman oil fairway with wells producing 7,000 boe/d (85% oil) for $600 million. After attributing $100 million of the deal value to acquired midstream assets and backing out production at $30,000 per boe/d, Devon estimates it is paying $1,100 per acre for undeveloped leasehold-notable in a 2015 deal market where assets have often sold for the value of their existing production alone.

Devon will pay $300 million cash to sellers NewWoods Petroleum, Renos Land & Minerals and REMI Midstream and issue shares valued at $300 million to NewWoods, according to an SEC filing. NewWoods is a portfolio company of First Reserve and the successor of Permian driller RKI E&P. When WPX announced it was acquiring RKI in July, it said the Powder River assets would not be part of the deal but rather would be divested or spun off prior to closing.

To fund the cash portion of these acquisitions and strengthen its financial position, Devon is planning $2-3 billion in asset sales next year including its Access pipeline system in Canada (in which Devon has $1 billion invested) and non-core upstream properties producing 50,000-80,000 boe/d (~50% liquids). Upstream assets being considered for divestment include Carthage field in East Texas, the Mississippi Lime, the Granite Wash and portions of the Midland Basin. On the conference call, Hager noted that Devon repaid all the debt taken on for its GeoSouthern acquisition within one year using non-core divestment proceeds.

Devon has already executed one of these non-core sales less than two weeks after announcing the program. Coming back into the buyside of the market, BP agreed to buy Devon's assets in the San Juan Basin. The bulk of the acquisition consists of Devon's operated stake in the Northeast Blanco Unit, a 33,000-acre coalbed methane project with 480 wells on federal land in San Juan and Rio Arriba counties, New Mexico. The deal adds to BP's existing 550,000-acre position in the area where it has been active since the 1920s. Market watchers will note that this marks the first acquisition in more than seven years for BP's Lower 48 onshore unit, which began operating as a separate business headquartered in Houston early this year.