While US Independents have been under constant pressure to slow drilling down due to capital constraints caused by weak natural gas, natural gas liquids, and crude oil prices, the majors have continued to drill horizontal wells at the same pace as when oil prices were $100 per barrel. In the first 6 months of 2013, the majors consisting of ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), Shell (NYSE: RDS.A), BP (NYSE: BP), and ConocoPhillips (NYSE: COP) drilled a combined 693 horizontal wells, and in the first 6 months of 2014, those operators drilled 632 horizontals wells in the US. Through the first 6 months of 2015, the group has combined for 668 horizontal wells, nearly 5% more than in the same period of 2014 when crude oil prices averaged $101 per barrel compared to $53 per barrel in 2015.
While Shell has slowed its investments in US Shale plays from 2013 and eventually exited from the Eagle Ford and Sand Wash Basin, the rest of the majors have increased the number of horizontal wells drilled to offset Shell's exit. In recent months, BP has even increased drilling, further growing the number of horizontal wells from 1-2 per month to 12 in June with a focus on the Anadarko & Arkoma basins of Oklahoma. Additionally, in the Permian basin, all of the majors but BP are highly active drilling 22 horizontal wells in June and Chevron has continued to move forward with development plans hatched in 2013 and 2014 of its Wolfcomp and Bone Springs positions.
While ConocoPhillips has been the most price responsive in regards to US horizontal drilling activity, cutting wells counts from 55 in November to just 30 in June, it also recently cancelled a long term commitment to a new deep water drill ship (Link to Press Release) slated for operations in the US Gulf of Mexico by paying a $400M cancellation fee. As part of this cancellation, Conocophillips announced its intent to focus more investment on its onshore North American projects. Should other majors follow suit could we begin to see higher drilling activity levels throughout 2015 and into 2016?
We have commented in the past on what we believe to be a major problem for the energy business, which is the large pool of private equity funds seeking investment opportunities. That money may merely extend the current difficult environment for the business. Our view is that much of this money will wind up supporting weak companies that should be eliminated or consolidated in order to help reduce industry capacity and accelerate the recovery that is necessary in order for the industry to return to profitability. This does not mean that all energy-focused private equity funds are poor investments or that all their investments will fail, but normally when so many dollars are seeking investment opportunities, future returns shrink and losses often become the norm rather than outsized profits. A recent story in The Wall Street Journal discussing the travails of First Reserve’s two recent multi-billion dollar private equity energy funds highlight this conundrum.
First Reserve may be the oldest energy-dedicated private equity fund having been founded in 1983 by John Hill, an Energy Department undersecretary in the Ford administration, and William Macaulay, an investment banker with Oppenheimer & Company. (In full disclosure, we know Mr. Macaulay and our prior employers did business with First Reserve.) These two gentlemen were early in seeking energy industry investment opportunities, starting during the industry’s first significant bust – the mid-1980s, oil-price-induced collapse. For those who experienced that period, many energy companies were victims of overleveraged balance sheets that were unsupportable when asset values collapsed in response to the dramatic oil price decline orchestrated by Saudi Arabia and the subsequent drop in activity. Often there were solid businesses underlying the debt debris, but many times the good and bad were both destroyed. During the mid- to late-1980s, by working with the banks to restructure loans and through judicious use of the U.S. bankruptcy courts, balance sheets of companies in the energy business were restructured.
First Reserve Billion Dollar Funds Struggling
Billie Hanley, Managing Director of GlobalOne EPC.
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