This column continues my series on $80-per-barrel oil and U.S. shale winners and losers.
In going over third-quarter reports from the U.S. E&Ps, Continental Resources (CLR) was the most interesting to me. Harold Hamm, CEO of Continental, was virtually alone in cutting 2015 capital expenditures and production guidance, a move obviously designed to help weather what I'm calling an $80-oil winter of sustained low oil prices.
In contrast, virtually every other CEO has "whistled through the graveyard" in refusing to adjust spend and production targets as part of their third-quarter conference calls. Considering that Continental is by far the best positioned Bakken E&P and Harold Hamm perhaps the smartest oilman ever, I tend to think his lone honest assessment will be far more on target than everyone else's.
We are going to see some major production and spend declines caused by $80 oil, and they will be financially forced upon some players that don't have the resilience of Continental Resources.
Let's look at some of the possible problem players in the Bakken.
In part one of our series, we isolated some of the attributes of producers likely to show strain from sustained low oil: rickety balance sheets, high-yield debt, holdings outside the core of the Nesson Anticline, and behind-the-curve technology and efficiencies, being a few. With this in mind, a couple of companies working in the Williston Basin appear likely to be in trouble over the next six months. Again, my thanks to Michael Filloon of Shaletrader.com for his excellent research help in isolating these likely "weakies:"
Emerald Oil (EOX): Higher well-completion costs and tough debt position. Its upper three forks acreage just won't produce fast enough to deliver a reasonable payback period in an $80 oil environment.
American Eagle (AMZG): Northern acreage is slow producer and can sustain only four wells per sector.
Magnum Hunter (MHR): Acreage is similar to American Eagle's and it is continually looking to shore up the balance sheet. Survival is dependent on the company's Utica natural gas play and it could make it, but not without jettisoning its Bakken holdings.
Northern Oil and Gas (NOG): Biggest problem, of course, is that the company doesn't own much of its acreage. This non-operative position puts it at the mercy of other operators and their scheduling, sure to decline with a low oil price. Plus, looking at its acreage you'd need much higher oil to deliver a reasonable payback. Six months of prices at this level will hurt a lot.
Triangle Petroleum (TPLM): New acquisitions in the North couldn't have come at a worse time. It has the advantage of its own completion and midstream assets and decent results, but still will likely need an exploration and production slowdown to weather the storm.
Halcon (HK): Good acreage in the Bakken is overridden by a miserable debt position, a race that Halcon will begin to quickly lose in an $80 oil environment. CEO Floyd Wilson has made one too many bad calls with this one (particularly in the Utica) and burdened the company with too much paper. It'll fight to the end, but is in a tough spot. Run, Forrest, run.
Oasis (OAS): In no danger of folding, but much of the company's acreage is outside the "sweet spot," including some poorly timed new acquisitions. It will have to hunker down in its solid plots in Mountrail, Williams and Mackenzie counties.
I've outlined these players not to predict any of their demises -- all we are seeking to find out is how much production growth is at risk and how soon that production slowdown might appear. Even larger producers like Continental will ultimately see production reductions if oil remains this low for longer than a year. At the end of this series, Michael and I will try to assess how much U.S. production is likely to come off line and when -- which will really mark the opportunity in the space for the future.
Next in the series, we will be attempting to find other stressed producers outside of the Williston Basin. In case you need a teaser, we'll start out in the Mississippi Lime and Tuscaloosa Marine Shale areas.
