Three independent producers took the stage at Oil and Gas Investor’s 5th annual Energy Capital Conference in Houston in June to discuss pricing and challenges facing E&Ps in today’s economic environment.
Floyd Wilson is chairman and chief executive of the newly formed Halcon Resources Corp., already with positions in nine oil-targeted resource plays and $1.5 billion in acquisitions since January. Wilson sold his Petrohawk Resources Corp. to BHP Billiton in 2011 for $15 billion.
Tom Ward is chairman and CEO of SandRidge Energy Inc. A historical gas-weighted company, SandRidge over the past three years has refocused to oil and natural gas liquids through aggressive acquisitions and leasing.
Jim Denny is executive vice president of operations for Magnum Hunter Resources. Magnum Hunter has operations in the Marcellus shale of West Virginia, the Bakken shale in the North Dakota Williston Basin, and the Eagle Ford shale in South Texas.
Highlights of their comments follow.
On horizontal oil development and the price of crude:
The U.S. has “a bursting basket” of shales and producers are just now starting to unlock the reserves, said Halcon’s Floyd Wilson. “We’ve seen wells come on at rates higher than I’ve seen in my life. We’re seeing wells like we’ve never dreamed” of because of technology.
As a result of new domestic oil coming online, he anticipates there is going to be a reset of the discovery price of crude based on new supply. “There is going to be some turmoil in the pricing,” he said. “It’s difficult to think you’re going to have a stable oil price going forward.”
SandRidge’s Tom Ward sees $85 oil as the new normal based specifically on finding and development costs. He notes the largest oil companies in the world are coming to the U.S. to drill.
“There is a tremendous amount of supply, but it does cost more to get that supply out. Somewhere around $85 you can make a decent return, but below that returns start to fall out.”
The recent downward trend of crude does not have Ward concerned about laying down oil rigs, when queried. In fact, “At $80 to $90 oil is where we start buying. In the Permian, we start hedging.”
Wilson shared the sentiment: “At $80 to $90, it’s all pretty good.”
Magnum Hunter’s Jim Denny has a slightly higher view. “Ninety dollars is probably the inherent price of oil right now. If you narrow the WTI price and the Brent differential, that models the Saudi’s outlook” for a sustainable price of oil.
On natural gas price’s affect on activity:
While Wilson believes gas prices are going to be soft for awhile resulting from unprecedented production from shales and sandstones, he provides the view of producers encumbered with dry gas projects in today’s pricing environment: “I suppose if you’re an idiot, you spend a lot of money and then don’t produce your product.”
Petrohawk, he illustrated, bought into the Haynesville shale and dry-gas parts of the Eagle Ford shale when gas prices and the forward strip were much higher. But, “if you were starting today with the same leases, you wouldn’t drill them. You would let them go at $2 (gas).”
Momentum, he said, is what keeps drill bits turning deep into down times. “You can’t just turn back 20 rigs on contract because you’re going to pay for them.”
The sale of Petrohawk was Wilson’s exit from the drill-to-hold gas business, he said. Now the new Halcon will only take long-term leases in oil targets.
Denny says Magnum Hunter, like other producers, needs a higher-than-breakeven price to fund projects, and calculates a certain rate of return when performing a breakeven analysis. For its Marcellus acreage, once processing comes on line, “we get aggressive at $2.75 to $3. In Kentucky in the Huron, it’s going to be higher, probably $3.50.”
Ward said gas prices would have to triple before SandRidge would consider investing any new capital to gassy projects.
Wilson emphasized that a rate of return on $4 gas cannot compare to a rate of return at $85 oil. “You’re going to spend your money on oil every time if you’ve got a choice.
“We made that choice (when he formed Halcon). To be competitive for capital, the gas price does have to go to $5. Not that you couldn’t make money at $4 gas, but if you have a choice, you’re going to choose oil.”
On acquisitions vs. organic growth:
Ward said it would have been impossible to spend enough money to change the company’s commodity weighting in a reasonable time by drilling. “Your EBITDA is going down as gas prices move down, all the while needing to spend more money drilling oil.”
SandRidge was targeting natural gas acquisitions as recently as 2008, but flipped the switch in 2009 with the $800-million acquisition of Permian properties from Forest Oil and the $1.2-billion merger with Arena Resources in the Permian. And the process was anything but easy, he revealed.
“It’s a painful process. It took us three years. We had to start out to buy oil by issuing equity to do it.”
Magnum Hunter held an advantage, said Denny. Active in two oily basins and one gassy one, most of its Appalachian Basin land was held by production. “We’re not in a mode to hold acreage.” Instead, the company now allocates 90% of capital to the liquids-producing Williston Basin and Eagle Ford shale.
For Halcon, “We’ll start off with a $1 billion or two of acquisitions of land and property, and maybe 20% drilling this year,” said Wilson. “It flips next year. We won’t spend that much on acquisitions, and about 80% on drilling.”
On being a contrarian buyer of natural gas:
“If I were buying natural gas and not a major,” said Ward, “I would make sure I had a very low cost of capital and a solid balance sheet--and be prepared to wait a long time.
“Our industry cannot survive this price forever. If you have a long time horizon, you can invest in the U.S. and feel safe, knowing it will be higher eventually.”
The issue for smaller companies, he said, is the cost of capital is higher, “and we don’t have the luxury of time to wait for the price to return.”
Denny added, “The majors are in there to make money, so they believe demand and supply ratio will be better going forward.”
Tom Ward, on the Dynamic Offshore Resources acquisition:
“The idea of us getting into the Gulf of Mexico was just a dislocation of the market. Post-Macondo, oil in the Gulf of Mexico was selling at a discount to what we could buy it onshore U.S.”
Dynamic traded at just a 3x EBITDA, he said, and they brought a team that could add bolt-on acquisitions in the Gulf.
“It was more accretive to us as a financial transaction than was selling acreage” in the Mississippi lime play. “We’re not trying to grow our Gulf of Mexico production; we’re trying to keep it flat. We’re only going to spend $200 million a year” to do that.
Jim Denny, on major oil companies in America:
“The majors are going to take a bigger stand than the foreign nationals or major financial institutions. Their appetite will be driven by rate of return and the value of where they can get in that makes sense.”
That will vary from basin to basin, he said, but “I think you will see independents rolled up in various basins, Appalachia in particular,” the Eagle Ford as well, both in which Magnum Hunter holds sizeable positions. “There will be a lot of synergy, but I don’t see them consuming the independents.”