"Oh yes, there will be blood." - Jigsaw
The recent hue and cry over crashing oil prices has mostly focused on OPEC and how the smaller member nations will grapple with austerity-level incomes while Saudi Arabia masterminds a long and painful recovery. (By way of full disclosure, there has been more cry than hue in my portfolio as a result.)
Saudi Arabia has famously invited the free market to resolve the problem of the low price of oil on its own. And though all eyes remain on the House of Saud, I think it is important to analyze the 2015 plans of a broad spectrum of energy companies as we enter the new year. With respect to these companies being de facto marginal producers in the great petroleum shell game, having an overview of their expectations for the coming year will help give us an idea of what to expect in the no doubt turbulent near future.
My Rather Blind Selection Methodology
Besides mega-cap organizations such as Exxon (NYSE: XOM) and Chevron (NYSE: CVX), and stocks which are currently in my portfolio or that I have written about, I selected the rest of the entries in this article based on no particular reason other than that they were oil and gas companies that had at least some exposure to oil. Some of these picks are more heavily weighted natural gas producers than others. Some of them are based in America or Canada, and others are based elsewhere. Some of these producers may not survive the coming year, while others are well-positioned to hunker down and wait out the storm. What is important to note is that I did not select individual issues to fit a particular narrative.
Once having selected the stars of this article, I set out to each company's website and read through their news releases, to find each company's adjustments in guidance and projected capital expenditures over the course of the next year. Through this exhaustive search, I hope to provide a general sense of the free market's response to Saudi Arabia's invitation.
Apache Corporation (NYSE: APA)
North American capital expenditure of $5.4 billion promised at the UBS Global Oil and Gas Conference in May has been revised downward to a much more restrained $4 billion proposal in their North American update provided on November 20. Further guidance has not been provided, but the company's stated confidence in being able to weather $70/bbl prices may be put to a much sharper test if the slump continues.
Bellatrix Exploration (NYSE: BXE)
Bellatrix's recent two-tiered decision to cut capital expenditure from C$450 million to C$300 million does not tell the whole story, as part of the budget is intended to construct a deep-cut gas plant for greater processing capability. However, Bellatrix's 2015 average production has dropped from 49-50,000 to 47-48,000 in light of this reduced spending.
Bonanza Creek Energy (NYSE: BCEI)
Bonanza Creek Energy's ambitious 2014 capital expenditure budget of $630-680 million had been increased to its latest figure in their 3Q earnings report, and no direct guidance beyond that has been provided. However, one clue as to their future plans can be derived from the related conference call:
"If oil prices slide in the low 70s, we will evaluate our pace out of respect for our balance sheet as we remained focused on staying within view of the two times net debt to EBITDAX metric, which is core to a balanced operating plan." - Tony Buchanon, COO
With this in mind, I would expect strong reductions as new budget evaluations are completed going into 2015.
BP (NYSE: BP)
Wracked with ongoing legal claims related to the Deepwater Horizon accident, BP had anticipated ongoing capital expenditures of $24-25 billion from 2015 and onward in its investor presentation from March 2014. The S&P's recent shift to a negative outlook on BP is partially due to expectations for heavy capital expenditures continuing through a low price environment, indicating that no significant shift downward is on the table as of now.
Cabot Oil and Gas (NYSE: COG)
Standing behind its production growth expectations of 20-30% in 2015, Cabot is budgeting $1.53-1.6 billion of capital expenditure for 2015, of which drilling and well completion capital will consist roughly 80%. However, the company is budgeting for $88/bbl oil, which at this point seems rather optimistic. Note that this is an increase from 2013's $1.19 billion capital expenditure program. I would not be surprised to see a revision come down the pipeline in early 2015, as it seems these price estimates are somewhat dated.
CAMAC Energy Corp. (NYSEMKT: CAK)
"If we achieve our production levels of 14,000 per day, we generate free cash flow of nearly $200 million next year. And that would be sufficient for us to drill at least one exploration well in the first half of the year, one well to increase production further in the second half of the year. What we do beyond that will depend on capital availability." - Earl McNeil, Senior VP and CFO
Like many other oil and gas companies, CAMAC is keeping relatively quiet about their 2015 capital expenditure plans. Even their 3Q earnings call did little to shed light on this question, as investors did not pry too forcibly into CAMAC's strategy during the conference.
Caza Oil And Gas (OTCPK: CAZFF)
Caza has not declared a 2015 capital expenditure budget in their news releases, but the company is targeting growth in the new year following early repayment of their Yorkville loan and strong hedging put into place:
And Caza has taken action to protect its bottom line from the lower oil price: about 75 per cent of production out to 2016 is hedged, and, says Ford, "all of them are in the money". One of the big headwinds on the stock, however, is not its ability to drill successful wells or deliver profitable production but rather concerns about its ability to service debt and access lower cost sources of capital.
Chesapeake Energy (NYSE: CHK)
Reducing capital expenditure has been a major point of Chesapeake Energy's value proposition according to their most recent investor presentation, and 2015 looks to continue the trend by targeting no greater than $5.4 billion in spending for the year.
VP and CFO Pat Yarrington seemed to hint at reduced capital expenditures in the company's 3Q earnings conference call on October 31, but stressed that major decisions would come this month while the company's 2015 budget is finalized:
"What I was trying to say is that we are just in the middle of doing our business plans at the very moment. And you know our process, we go through that at this time of year, we get approval of the Board and then we come out with our capital expenditure outlook for the year. And that typically would've happened in December. So we are right in the midst of pulling all the plans together." - Pat Yarrington, VP and CFO
Chinook Energy (GREY: OTCPK:CNKEF)
Without the drawbacks of struggling under a heavy debt load, Chinook Energy is poised to unleash a $135 million capital expenditure program in 2015 targeting liquid-rich natural gas in British Columbia and Alberta. Of this, $93 million will be targeted toward drilling. The company has indicated that the budget is indeed up for review in the event of continued depressed commodity pricing:
In order to protect a strong balance sheet entering into 2015, and maintain a debt to trailing cash flow ratio of less than one, we have built our 2015 capital program with the flexibility to increase or decrease our capital expenditures should commodity prices be above or below our 2015 pricing assumptions.
Cimarex Energy Corp. (NYSE: XEC)
Their production split nearly evenly between oil and gas, Cimarex gives scant clues as to their 2015 capital expenditure budget. Their 3Q November update indicates a 2014 budget of $1.95 billion.
Concho Resources (NYSE: CXO)
Concho is one rare company that is seeking to execute large increases in production in 2015, budgeting $3 billion for capex in 2015 as of their 3Q results release. To this end they have hedged roughly 42,000 barrels per day for 2015 at an average price of $87.22 per their derivatives information column on this page, or about a quarter of their target output.
Conoco-Phillips (NYSE: COP)
Conoco-Phillips has severely reduced year-over-year capital expenditure for 2015 to $13.5 billion, a decrease of roughly 20% from 2014 levels. The company remarks that its non-Libya production is slated to nonetheless increase by 3% in 2015, but their guidance on their Libyan assets remain somewhat murky. The company also plans to finalize its capital expenditure plan this month.
Diamondback Energy (NASDAQ: FANG)
While Diamondback Energy has not provided specific details of any capital expenditure cutbacks, cuts are on the table as per this quote from their 3Q conference call:
"We will enter 2015 running five horizontal rigs consistent with previously stated plans. But, if commodity prices haven't improved or service costs have not declined Diamondback will respond by drilling fewer wells in 2015 than initially anticipated. However, we intended to continue to run two horizontal rigs on our Spanish Trail acreage consistent with guidance from Viper Energy Partners."
To this end, CEO Travis Stice emphasizes (page 4 of the same transcript) that few drilling requirements are in place to retain lease holds on their wells, so Diamondback will have flexibility in the coming year.
Eland Oil And Gas (GREY: ELOGF)
Eland Oil And Gas also trades on the London Stock Exchange as ELA. After having finalized its access to its $22 million loan facility, Eland is presently evaluating its 2015 capital expenditure commitments.
Emerald Oil (NYSEMKT: EOX)
One of the most drastic reductions in 2015 capital expenditure projections was reported by Emerald Oil, who cut planned spending from $210-240 million to $62-81 million for the year, along with a material reduction in production to 4,200-4,500 boepd. I believe the destruction of the stock price to this news was unwarranted, and the stock has already recovered about 30% from its lowest point.
Encana Energy (NYSE: ECA)
Encana is banking on higher realized oil prices in 2015 as their projected budget has actually increased this year to $2.7-2.9 billion, up from a previously announced $2.5-2.6 billion. After successfully acquiring Athlon Energy (the transaction closing in November), Encana is making a bullish push to grow business in spite of ominous sector-wide headwinds.
EOG Resources (NYSE: EOG)
EOG Resources' 2014 capital expenditure budget of $8.1-8.3 billion projected in their 2013 annual report will likely need to be cut by roughly $2 billion in order to balance their books if oil stabilizes at $65, indicates SA contributor Richard Zeits in his excellent article. However, the company has not seen fit to release guidance for its 2015 capital budget at this time. Zeits also pointed out EOG's weak hedging protection for 2015 and their typical financial discipline as key factors hinting toward a capex reduction for the coming year.
Evolution Petroleum (NYSEMKT: EPM)
Without speaking exactly to what the updated figures might be, Evolution's November 19 capital expenditure update referenced their previously stated figure of $25-27 million annually for the Delhi field in 2015 and 2016, including a $15-17 million expense to help build a NGL and methane gas plant. Therefore we can anticipate that the final budget will be between $15 and $27 million, but not likely near either extreme.
At their investor's meeting on March 5, Exxon announced a planned 6% reduction in overall capital expenditures stretching through 2015-2017 at the same time as they announced a total of ten new oil and gas projects for 2014. At the time, shares dipped roughly 3% on that news which now seems positively prescient. Exxon is projecting a 35% increase in world demand by 2040, and is positioning themselves for the long run even while bracing for low prices in the present.
Goodrich Petroleum (NYSE: GDP)
A preliminary 2015 capital expenditure budget of $150-200 million will divert 95% of its total budget toward exploiting oil resources in the Tuscaloosa Marine Shale, which is a stark drop from a projected $320-335 million reported for 2014 in their 3Q report. Nonetheless, Goodrich projects an increase of oil volume to a yearlong average between 6,100 and 6,700bbl/day.
Gulfport Energy Corp. (NASDAQ: GPOR)
Gulfport Energy is presumably still hoping to grow production in 2015, but their 3Q report gave no immediate direction or clarification on those plans. From the report:
"With regard to 2015 activities, Gulfport anticipates providing its 2015 guidance and budgeted activity levels in early 2015 allow additional time to gain clarity surrounding the current commodity price environment."
Halcon Resources (NYSE: HK)
Another embattled producer, whose problems were detailed in the excellent article Halcon Resources And Tuscaloosa Marine Shale: Is This Goodbye Forever? by Value Digger, Halcon is targeting planned 2015 capital expenditures of $750-800 million, down from a previously announced $950 million. CEO Floyd Wilson commented:
"We will not employ five rigs that we had prior plans to employ next year," said the CEO. "We'll run six rigs to get started here and see how the year unfolds...We will remain flexible to increase or decrease that capital program for 2015."
Kelt Exploration (GREY: OTC:KELTF)
A 2015 planned capital expenditure budget of $215 million includes $163 million spent on drilling, targeting production growth while nonetheless representing a 24% year-over-year budget decline in drilling. The company also is planning to make no acquisitions in 2015 at this time.
Laredo Petroleum Holdings (NYSE: LPI)
Laredo is drastically cutting its year-over-year capital expenditure budget to more wholly take advantage of its extremely strong hedging program, targeting $525 million for 2015 (down from over $1 billion in 2014).
Linn Energy (NASDAQ: LINE)
Linn's staggering debt levels, well north of $10 billion, are under attack by the company with strategic divestitures on the table. One can infer that production and capital expenditure will decline in 2015 in tandem with these property dispositions. But Bloomberg's article Linn Energy Follows Majors in Holding Budget to Cut Debt does not directly describe capital expenditure cuts, and investors will have to wait a little longer to hear more from the company themselves.
Lonestar Resources (OTCQX: LNREF)
Heavy capital expenditure cuts by Lonestar Resources were announced on December 9 by Lonestar, bringing the budget to a range of $85-101 million from $100-125 million. Lonestar will be seeking to complete 15-17 wells in 2015 under their current expectations of WTI pricing of $65-80 per barrel, so we will have to wait and see whether further revisions come. Still, even with these cuts in place, Lonestar is also planning to increase production through 2015.
Lynden Energy (OTCPK: LVLEF)
Lynden's fiscal 2015 capital expenditures (which cover the period July 2014- 2015) have not yet been changed from their announced figure of C$34 million included in their 2Q report, although of course provision is made for adjustments based on prevailing market conditions.
Magellan Petroleum Corporation (NASDAQ: MPET)
Magellan Petroleum has not released guidance that alters their 2015 capital expenditure in any way. Their budget is not likely to change much due to their focus on their Poplar Dome CO2-EOR project, of which early results are expected in mid-2015. This project will require a steady flow of capital expenditure over the next few years in order to realize its potential. In order to meet this need, Magellan has authorized up to $10 million in new equity in addition to the sales of their Palm Valley and Dingo gas fields in March 2014. Meanwhile, their Horse Hill-1 well is proceeding well without need for further capital expenditure, as costs are being carried by Angus Energy.
Magnum Hunter Resources (NYSE: MHR)
Successfully divesting its oil properties in 2014 for greater than $110,000 per flowing barrel, Magnum Hunter Resources has fully transitioned into a natural gas producer.
Manitok Energy (GREY: OTC:MKRYF)
Manitok has not released information regarding 2015 capital expenditures.
Marathon Oil (NYSE: MRO)
Another large company that has already announced capital expenditure cuts, Marathon is planning a cut to $4.3-4.5 billion in 2015. This is down roughly 20% from their anticipated 2014 budget.
Newfield Energy (NYSE: NFX)
Aggressive divestitures by Newfield are targeting their 3Q end long-term debt of $3 billion, including the sale of their Granite Wash assets to the tune of $582 million. With $1.75 billion in capital expenditures in 2014, Newfield Energy has a lot to consider in the new year if they choose to maintain their current levels of drilling. No current guidance has been provided yet by the company to update their initial estimates of $1.6-1.8 billion for the years 2015-2017, however.
Nighthawk Energy (OTCQX: NHEGY)
Though their hedging program remains extremely weak, averaging at $74/bbl for 2015, Nighthawk has planned a capital expenditure program of about $25 million even as recently as their December investor presentation. This is up slightly from their September 2014 year end estimate of $22.4 million from their 2Q interim results. 3Q should be coming very soon and we may see additional guidance there.
Ophir Energy (OTCPK: OTCPK:OPGYF)
Notwithstanding an agreement toward acquiring Salamander Energy made in November, Ophir Energy looks to cut capital expenditure in 2015, per Ophir's 2Q interim report (reports are biannual rather than quarterly).
Parex Resources (GREY: OTCPK:PARXF)
Parex's 2015 capital budget uses the optimistic assumption of $85/bbl Brent pricing to fully fund its exploration budget via internally generated cash flow. $330 million represents a 14% increase from 2014's $290 million budget (figure not including acquisitions).
Penn Virginia Corp (NYSE: PVA)
Echoing many similar sentiments among oil and gas producers, President and CEO H. Baird Whitehead commented in the 3Q results report:
"With respect to 2015, we expect to see continued growth in production and cash flow, but we are reassessing our previously announced preliminary guidance and our level of capital expenditures for 2015 in light of the current and projected oil price environment. We plan to release updated 2015 guidance in mid-December after our budget is finalized."
Penn's previous forecast from August 25 had been $750-800 million for 2015, but I believe this will likely adjust downward.
Petroamerica Oil Corp. (OTCPK: PTAXF)
Petroamerica has not completed guidance for 2015 yet. Production interruptions from the Suroriente block have been eliminated, and the company expects to exit 2014 at previously targeted production levels.
Quicksilver Resources (NYSE: KWK)
Quicksilver has not announced an official budget as of yet, but in their 3Q conference call, CFO John Regan had this to say:
We are near the end of our process to set capital spending targets for 2015 but much depends on the results of the marketing effort currently underway. In any outcome, we do not expect 2015 capital spending to exceed this year's spending projection.
This should cap capital expenditure to $135 million for 2015, with a strong probability that it will be lower. The company is seeking results from its asset divestiture program in order to finalize its 2015 budget (per President Glenn Darden, answered during caller questions).
Also downgraded by the S&P for the same reasons as BP, Royal Dutch Shell is hampered by a particularly costly drilling structure, particularly in its Chukchi assets, which require extremely high oil prices to be profitable-above $95/bbl, in fact. The company had already halted its also-costly Pierre River oil sands project in February. Shell is currently undergoing significant asset disposals to improve efficiency and cost structure.
Rock Energy (OTCPK: OTCPK:RENFF)
A 2015 capital expenditure budget of $90 million represents a decrease from the 2014 figure of $115 million, as listed on their Q3 results report. Targeting $80/bbl WTI is rather optimistic at this point, however, and it should be noted that this budget is only preliminary.
RSP Permian, Inc. (NYSE: RSPP)
RSP Permian has retained liquidity sufficient to match its 2014 capital expenditure budget, of which $400 million was drilling-related and $250 million was related to acquisitions. (See Capital Expenditures and Liquidity Update highlights for details.) However, while current 2015 guidance has not been provided, I would be surprised if upcoming capital expenditures were to match their ambitious 2014 budget.
Sabine Oil And Gas (OTCQB: FSTO)
Announced on May 06, Forest Oil And Gas completed a strategic merger with Sabine Oil And Gas as of 12/16, and has begun trading on the OTCQB market board as FSTO. We are awaiting further guidance.
Sandridge Energy (NYSE: SD)
The embattled Sandridge Energy, dealing with the twin menaces of a pending lawsuit and crushing debt, is actually increasing its capital expenditure projections for 2015 to account for additional leasehold and seismic data costs (page 8). Among other things, Sandridge is obligated to drill 35 new wells for their royalty trusts Sandridge Mississippian Trust (NYSE: SDR) and Sandridge Permian Trust (NYSE: SDT) in order to complete its drilling obligations.
Strategic Oil And Gas (OTCPK: SOGFF)
The subject of one of my earlier articles, Strategic suffers from weak netbacks and a modest hedging profile. The board has approved C$52 million for the first half of 2015 per the company's 3Q MD&A, targeting 5,000 boepd average for that period, although at oil's rock-bottom pricing those plans seem ambitious. I would ordinarily expect capital expenditure cuts, and I believe that would be the most sensible move for this company at this time, barring any outside requirements. However, Strategic's management seems to be committed to growth, and we will see whether it pays off in the end.
Surge Energy (OTCPK: OTCPK:ZPTAF)
While providing a sustainability report at the end of October with an eye toward addressing concerns about lower oil prices, Surge has not released specific guidance on their 2015 capital expenditure plans as of yet. Whatever the case, Surge predicts an increase of 17% throughout 2014, and it remains to be seen what will come of 2015.
TAG Oil (OTCQX: TAOIF)
Another subject I covered in a recent article, TAG Oil is focused on developing oil-producing assets in New Zealand. TAG's strong cash position is mitigated by its difficulty in drilling profitably flowing wells. Their capital expenditure for FY 2015 already represents a drawdown from their FY 2014 budget, which averaged out to NZ$17.3 million per quarter.
Talisman Energy (NYSE: TLM)
Some observers derided the Repsol acquisition of TLM at $8/share as too richly valued for such a depressed issue. Others pointed at a share price hovering around $12 at the beginning of the year and demanded more. Whatever the case, Talisman has seen fit to keep their 2015 expenditure budget close to their vests at this time.
Whiting Petroleum (NYSE: WLL)
Whiting's surprising acquisition of Kodiak Oil And Gas closed on December 8. With this in mind, and to the extent that it will be contingent upon the success of their asset divestiture goals, expect guidance to be finalized in February 2015 upon release of 4Q results.
Zargon Oil and Gas (OTCPK: ZARFF)
To the announcement of the closing of their Hamilton Lake property divestiture on December 22, which saw production of 170bbl/day of liquids and roughly 1400mmcf/day of natural gas sold for C$22.5 million in cash and C$2.5 million in securities, Zargon appended a revised capital expenditure budget of C$32 million for 2015, down from C$46 million from their 3Q financial report. Of this, the majority of the cuts came to their conventional drilling budget, lopping it to C$12 million. Zargon continues to target C$20 million for their ASP project, which is hoping to strike large payoffs in 2016 and 2017. The company also halved its dividend due to the challenging price environment, though it still stands at nearly 10.2% annually.
One consistent theme remained clear-few companies wanted to go on the record and indicate that guidance or production would be lower for 2015 than in 2014. Of the companies that did concede a forthcoming reduction in capital budget, most seemed to promise flat year-over-year production. Whether this actually occurs remains to be seen, particularly given the rapid decline rates of shale wells, but if flat year-over-year production can be maintained by the majority of oil producers throughout 2015, we may yet have to look toward Saudi Arabia and the rest of OPEC for price support once again, hoping they cut at last once competitive drilling has temporarily subsided.
More companies were ambitious about their 2015 prospects than I had expected, although many of these hopeful budgets came from 3Q earnings reports declared while oil was still in the high $80s. Of these companies, some had given lip service to the idea that capital expenditure budgets could be revisited in the event that oil swung lower yet. Consequently, we may be looking at more capital reductions in the near term as laggard budgets are revised in the new year.
This will have to remain a developing story for now, as we await further guidance from firms who have not already given guidance. Please feel free to update or correct any of my findings, as much of this news will be subject to further revision; and of course, I may have missed something important somewhere.
Disclosure: The author is long ZARFF, CAZFF, LNREF, PTAXF.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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