Shale pioneer Hamm says industry can weather crude price slump – FT.com

Shale pioneer Hamm says industry can weather crude price slump – FT.com.

 

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US shale oil companies are likely to cut back their capital spending plans as a result of the steep fall in crude prices, but are much better placed to withstand a downturn than they would have been two years ago, according to one of the pioneers of the boom.

Harold Hamm, chief executive of Continental Resources, told the Financial Times all shale companies were reviewing their plans, and some were already cutting back on drilling.

However, he said, the industry would not fall into a crisis in the way it might have done had the oil price fallen this far in 2012.

Oil has gone into a slump in the past three months, accelerating this week, as a result of a sharp slowdown in demand growth and signals from Saudi Arabia that it will not cut production to stabilise the market.

Mr Hamm said he did not believe the Saudi actions were aimed intentionally at undermining the US shale industry, but acknowledged that the decline in the oil price would affect it.

Continental was one of the first companies to develop the Bakken shale of North Dakota, which along with the Eagle Ford of south Texas and the Permian Basin of west Texas has been one of the heartlands of the US oil industry’s revival. Mr Hamm’s 68 per cent stake is worth about $13.6bn.

Like many shale producers, Continental is still spending more than its operating cash flow on drilling rigs and other capital expenditures. Mr Hamm suggested that many companies would want to bring their spending into line with their income.

“When the market’s going up, you can overspend what your cash flow is, with confidence. But when the market’s going down, it’s not best to do that, because the debt market goes away,” he said.

Junk bond issuance by oil and gas companies soared during the boom of the past five years, leaving many vulnerable to a fall in revenues.

Continental has an investment grade rating, which it gained last year, and a ratio of debt to earnings that is below average for the sector.

It unsettled investors last month with a projection that its capital spending would rise to $5.2bn next year, up from $4.55bn this year, which was also an increase from the $4.05bn it had originally planned.

However, Mr Hamm argued the company has plenty of flexibility to respond to falling crude prices.

“You can project [capital spending] upwards, but if the price comes back, then you can dial capex back down,” he said.

Other small and midsized oil exploration and production companies that led the shale revolution have been giving similar indications.

Scott Sheffield, chief executive of Pioneer Natural Resources, another leading shale oil producer, told a conference in Washington DC on Tuesday that there would be a “significant cutback” in oil drilling if US benchmark West Texas Intermediate crude fell below $70, and “some cutback” even at $80. The price on Thursday was $80.24

“If it drops into the $70s and the $60s, you will see significant curtailment,” he said.

“The E&P [oil] producers will start reducing the number of jobs, if we thought it was going to drop to those levels – say the $60s and $70s – and stay there long term.”

The Commodities Note

Low oil prices do not ensure shale output cuts

pump jacks at an oil field in the Monterey shale formation in California

Saudi Arabia’s production increase in September has left traders and analysts struggling to find their bearings in an oversupplied market.

In theory, the price of any commodity should be the cost of producing the next marginal unit of said commodity. With the Brent benchmark hovering close to $85 a barrel, the debate has been where the break-even point for US shale producers is and whether a fall in prices will lead to a cut in output.

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The reason Mr Hamm does not expect a disaster in the industry is that the production companies are no longer constrained by “hold by production” leases. The typical industry lease gives a company the right to explore and produce oil and gas from a patch of land, so long as it drills a well and starts production within a set period.

In the early days of the shale boom, when companies were grabbing land portfolios as fast as they could, they often had many leases with no wells on them. A falling oil price would have forced them to choose between drilling uneconomic wells and losing all their assets – a prospect that could have proved terminal for many companies.

Now, though, Continental has drilled on about 95 per cent of its Bakken leases. Other companies operating in the Eagle Ford and the Permian are in a similar position, Mr Hamm said. “People have held their acreage, and they can sit back.”

He does not expect the decline in the oil price to last very long. “It will correct, and it will come back,” he said.

In the long term, Mr Hamm argued, the market for oil is bound to tighten. Development in China and other emerging economies will create growing demand for transport, where there is still no fully effective alternative to oil.

But he added that even the US shale boom, as spectacular as it has been so far, must eventually run out. “Before people get drunk on their own wine, they ought to realise that it’s not forever,” he said.