Oil bear market separates strong, weak U.S. shale producers

HOUSTON (Reuters) - Crude oil’s bear market is highlighting the haves and have nots among U.S. shale producers, with the stronger promising to keep pumping even as prospects dim for some of their financially strapped peers.

A service truck drives past an oil well on the Fort Berthold Indian Reservation in North Dakota, November 1, 2014. REUTERS/Andrew Cullen

Crude prices have dropped more than 20 percent since late February, in part because of rising U.S. shale production that is offsetting OPEC’s efforts to tame global stockpiles. On Wednesday, prices fell more than 2 percent to $42.58 after touching a 10-month low during the day.

The price tumble has dragged down shares of oil and natural gas producers and raised the specter of trims to drilling budgets set when oil was trading around $50 a barrel. Oil producers’ average capital spending was previously projected to rise by 50 percent this year over depressed levels of 2016.

Analysts say prices that stick between $40 and $45 a barrel could trigger some companies to quietly scale back planned drilling activities. But industry-wide, major changes to capital spending budgets likely will not be announced until later this summer as quarterly results are released.

“Companies will try to push that back as long as possible,” said Dan Katzenberg, an oil industry analyst at Baird.

A Wall Street sell-off of energy stocks largely has spared those shale producers with strong balance sheets, hedged production and significant operations in the Permian basin. Investors are treating them as likely not only to survive but thrive at below $45 a barrel.

The Permian Basin of West Texas and New Mexico, America’s largest oilfield, can produce profitably even if oil prices drop below $40 per barrel.

“Investors are starting to make that separation between companies that were already outspending cash flow and those that weren’t,” said Baird’s Katzenberg.

Permian producer Parsley Energy Inc, which has hedged most of its production through 2019, bullishly raised its production forecast last month.

“I don’t see Parsley dialing back,” said Chief Executive Bryan Sheffield.

Shares of Parsley, which operates in the Permian, fell 1.6 percent on Wednesday.

By contrast, Whiting Petroleum Corp, heavily in debt from a 2014 buyout deal that made it the largest oil producer in North Dakota’s Bakken region, saw its stock price drop 9.2 percent on Wednesday.

Whiting, which nearly doubled its 2017 capital budget in February, did not respond to a request for comment.

Some oil producers see the crude price drop as an opportunity to buy acreage cheaply from distressed peers.

“I’m kind of licking my chops right now,” said Avi Mirman, CEO of Lilis Energy, which bought Permian acreage at a discount when oil prices last plunged two years ago.

“I would not complain if oil prices got down into the $30s” per barrel range, he said. Shares of Lilis fell 1.8 percent on Wednesday. The stock is up 13 percent in the last three months.

Wall Street’s optimism on the financially strong may be based on future trading projections for oil prices, which show a slight increase through the end of the decade.<0#CLCAL:>

“That picture is very important for psychological reasons,” said Scott Sheffield, executive chairman of Permian producer Pioneer Natural Resources Co, one of the leading U.S. shale producers.

WPX Energy, also a Permian producer, said it has no plans to dial back its drilling.

“We’ve already contemplated this scenario (of falling oil prices) and planned for it to protect our drilling plans and our production targets this year and next,” said WPX spokesman Kelly Swan.

(This version of the story was refiled to remove extraneous words in paragraph eight)

Reporting by Ernest Scheyder; Editing by Gary McWilliams and Cynthia Osterman