American oil explorers who survived the worst of the 2014-2016 market rout are shrugging off the 14 percent slide in crude prices this year from a high of $55.24 to less than $49 a barrel Wednesday.
The price would have to drop to less than $40 to dent the bottom line of many drillers now working U.S. shale fields, said Katherine Richard, the chief executive officer of Warwick Energy Investment Group, which owns stakes in more than 5,000 oil and natural gas wells.
That's because many producers already have locked in future returns with financial contracts that guarantee the price of their oil for most of the rest of the decade. Such resilience poses a dilemma for countries that agreed to an OPEC-led production cut aimed at tightening supplies to raise prices and relieve their distressed national economies.
"We're in a boom again in Texas, despite what's happening with prices lately," said Michael Webber, deputy director of the University of Texas' Energy Institute in Austin. "The cowboy spirit is back. Hedging is playing a big role."
Oil prices took another hit Tuesday after Saudi Arabia dropped a bombshell on OPEC: the Saudis, heavyweight of the 13-nation cartel, raised their output last month to more than 10 million barrels a day, reversing about a third of the cuts made the previous month.
Though Saudi Arabia is still meeting its commitment even with the increase, other members are lagging and the disclosure intensified concern that the group won't be able to muster enough of the promised cuts to strengthen the market.
Just last week, Saudi Energy Minister Khalid Al-Falih warned a Houston energy conference that the kingdom won't indefinitely "bear the burden of free riders," a veiled shot at Russia, Iraq and the United Arab Emirates, which have yet to deliver all the curbs they promised. At the same time, shale billionaire and Continental Resources Inc. founder Harold Hamm cautioned that unbridled drilling by shale explorers would crush prices and "kill" the oil market.
Prices are probably headed even lower in coming months, Warwick's Richard said. Explorers that own drilling rights in the richest zones of the most profitable shale plays will continue making big returns, prompting them to increase output even more, while weaker companies on the fringes of the best zones will falter, she said.
West Texas Intermediate, the benchmark for U.S. crude, settled Wednesday at $48.86 on the New York Mercantile Exchange after earlier falling Tuesday to as low as $47.09 a barrel, the lowest level since late November.
Hedging is how oil companies shield themselves from a potential market collapse. Risk-management teams buy and sell derivatives such as options contracts that set a floor and ceiling on the price a company will receive for its oil. The banks on the other side of the trade get a fee and may record additional gains if the market moves in their favor. If the price drops, the oil company is protected.
Pioneer Natural Resources Co., one of the most prolific drillers in the Permian Basin beneath Texas and New Mexico, had 85 percent of its projected 2017 crude output hedged as of last month. Another 10 percent of estimated 2018 production also was protected, according to the Irving, Texas-based company. Pioneer's founder and Chairman Scott Sheffield predicted last week that crude will drop to $40 if OPEC and its allies don't extend their output cuts beyond June.
Parsley Energy Inc., an Austin, Texas-based explorer created by Sheffield's son, Bryan, as of last month had locked in prices for barrels that won't be pumped until 2019. Other well-hedged oil producers include RSP Permian Inc., Chesapeake Energy Corp. and Diamondback Energy Inc.
Among those undeterred by falling oil prices is billionaire investor Richard LeFrak, chief executive officer of the LeFrak Organization in New York, who has invested in drilling properties in Oklahoma and the Permian. In a Bloomberg TV interview Wednesday, LeFrak said he's not hedging -- "I'm not that smart" -- but that all his projects in the Permian are profitable at $50.
Oil "has turned into more of a mining business than an exploration business," he said. "The technology today is so sophisticated it's really not about, 'Is it there?' It's mostly about 'How much of what is there can I recover and what is it going to cost to do that?'"
The number of rigs searching for crude in U.S. fields has nearly doubled to 617 since hitting a multiyear low in May. And while crude prices are up more than 80 percent since touching a 12-year low of $26.05 in February last year, prices haven't topped $55 since the first week of January.
The growth in the rig count is expected to taper off if oil prices don't climb above $55 a barrel around the end of this month, Andrew Cosgrove, an analyst at Bloomberg Intelligence, said in a phone interview. It would take oil dropping below $50 for a few months to bring about an actual reduction in the rig count, he said. In recent weeks, even prices above $45 were enough to encourage explorers to rent more rigs, he said.
Business on 03/16/2017