With Oil Prices Recovering, Rig Count Steadies

27 Jun 2015 | Author: | No comments yet »

In bet on oil prices, WPX plans to add Bakken rigs.

WPX Energy (NYSE: WPX) plans to increase its activity in the Williston Basin during the second half of 2015 by resuming completions and increasing its rig count from one to three before year-end. WPX Energy Inc, a small oil producer in the No. 2 U.S. crude state, said it will add two rigs this year, becoming the first since the crude price downturn to announce concrete steps to boost output. The decision follows process improvements, structural changes to lower costs, discussions with key vendors, a technical analysis of WPX’s well performance that led to higher estimated ultimate recoveries (EURs), and favorable results from larger stimulations. Executives say they face a dilemma: they want to drill more to capture a recent upturn in prices, but worry widespread new rig deployments would cause prices to slump again.

The company’s estimated drilling and completion costs in the basin are approaching $8 million per well with 6 million pound completions, representing a decrease of more than 30% vs. its average in 2014. The company is now recognizing a blended type curve of approximately 750 Mboe for its wells in the Middle Bakken and Three Forks formations, up 25% per well from previous estimates of 600 Mboe.

In a statement, WPX President and CEO Rick Muncrief said, “The combination of cost reductions and higher EURs gives us the opportunity to generate returns in excess of 30 percent in today’s commodity price environment.” Although WPX is one of the smaller producers operating in the Bakken, it maintains a leading position in the region and plans to cut well completion costs and increase output in 2016 by 20 percent. Energy Information Administration said last month it expected nationwide oil output to fall through September from March levels of about 9.3 million barrels per day, specifically due to a drop in the nationwide rig count. Analysts at Deutsche Bank downgraded shares of WPX Energy from a buy rating to a hold rating and set a $16.00 price target on the stock in a research note on Thursday, June 4th. According to Thomson Reuters Oil Research & Forecasts, if 200 rigs were added through December, the associated new crude supply would erase about $2.44 a barrel from U.S. crude prices this year. The move comes after Muncrief, a former Continental Resources Inc executive, told Reuters last month he would add rigs if oil prices stabilized around $65 per barrel.

As oil prices climbed from around $45 to about $50 per barrel, the price gap between Bakken crude and the West Texas Intermediate benchmark began to close, suggesting that some operators are once again preparing to increase activity. But prices have recovered somewhat since April and the rig count appears to have hit a bottom, fueling speculation that the oil industry will start to grow again. Although prices haven’t quite reached that level, Muncrief is confident that with current prices, when combined with the company’s improved processes, resuming operations is a viable option. Whiting, EOG Resources Inc and other large Bakken producers have all hinted at the price range at which they would resume drilling and hydraulically fracturing, but WPX is the first to make a commitment. He said, “We’re realizing the value we have on this acreage to a fuller extent through technical excellence, improving the way we develop the asset, and looking at the operations through a new lens.” In addition to adding one rig in August and another in November, the company will begin completion operations on its inventory of 14 wells in August, starting with a four-well pad.

By opting to utilize a higher intensity slick-water design rather than the previously used sand and ceramic proppant, the company anticipates increased initial production rates and EURs. To be sure, adding two rigs in a state with 76 active rigs is statistically small, especially as the count stood near 200 a year ago, but it highlights a potential inflection point for the entire Bakken. The Company’s other areas of domestic operations include natural gas plays in the Appalachian Basin in Pennsylvania, the San Juan Basin, and the Powder River Basin in Wyoming. In addition, the Company owns approximately 69% controlling ownership interest in Apco Oil and Gas International Inc., which holds oil and gas concessions in Argentina and Colombia.

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