This page has been archived and commenting is disabled.
The Chilling Thing Devon Energy Just Said About the US Oil Glut
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
The oil-price plunge hit the industry when it was drunk on its own exuberance and awash in money. At the time, over-indebted junk-rated drillers had no trouble borrowing even more to drill more, efficiently or not. Dreadful IPOs flew off the shelf. Misbegotten spin-offs made Wall Street a ton of money. But in July, everything started to go awry. By October, it was clear that the oil-price plunge wasn’t a blip. By November, oil was in free fall.
Soaring production in the US, reaching 9.2 million barrels per day in January, and lackluster demand have caused US inventories to balloon. The “oil glut” was born.
So the industry adjusted by announcing waves of layoffs, whittling down operating costs, renegotiating prices with suppliers, and slashing capital expenditures. The number of rigs actively drilling for oil – a weekly gauge that indicates what’s going on in the oil field – has plummeted by 553 rigs, or 34%, since the peak in October. Never before has it plummeted this fast this far [The Fracking Bust Hits Home].
The crashing rig count was supposed to curtail production, and lower production would bring supply and demand into balance and allow the price of oil to recover. But the opposite is happening. And Devon Energy Corp. just told us why.
With total operating revenues of nearly $6 billion in the fourth quarter 2014, Devon isn’t the largest oil company out there, but it’s one of the larger players in the US shale revolution.
It reported Q4 results on Tuesday evening. According to its own measure of “core earnings,” it made $343 million. According to GAAP, it lost $408 million, after writing off “asset impairments” of $1.95 billion “related to the recent drop in oil prices.”
Stuff happens when the price of oil plunges.
But production soared – and will continue to soar. CEO John Richels explained the phenomenon in the press release:
We expect to sustain operational momentum in 2015 with the significant improvements we have seen in our completion designs and a capital program focused on development drilling. With strong results from our enhanced completions and a focus on core development areas, we expect growth in oil production to be between 20 and 25 percent in 2015, even with a projected reduction of approximately 20 percent in E&P capital spending compared to 2014.
So, despite slashing the capital expenditure budget by 20%, the company’s oil production in 2015 would grow 20% to 25%.
And in Q4 2014, production of oil, gas, and natural gas liquids from Devon’s “retained assets” had soared to an average of 664,000 oil-equivalent barrels (Boe) per day. This included record oil production of 239,000 barrels per day, up 48% year over year. While bitumen production in Canada grew more slowly, oil production from fracking in the US soared 82%!
This chart shows Devon’s oil production for the last five quarters:
Oil production is projected to grow another 20% to 25% in 2015. This is how Devon explained the phenomenon:
The strong growth in U.S. oil production during the quarter was largely attributable to prolific well results from the company’s world-class Eagle Ford assets. Net production in the Eagle Ford averaged 98,000 Boe per day in the fourth quarter, a 100 percent increase compared to Devon’s first month of ownership in March 2014.
And in 2015, it expects a 50% increase in production from the Eagle Ford shale.
Devon liberally praised its “significant scale in core plays,” “a consistent focus on efficient operations,” and “significant improvements in completion design.” In other words, it would spend less, it would use fewer rigs, but it would spend more efficiently – and produce more oil.
Oil – not natural gas. The price of natural gas has been a fiasco for years, and Devon has been moving away from it by selling assets and focusing its resources on oil-rich plays. Hence, natural gas production has actually edged down over the last three quarters even on a retained assets basis.
Devon will drill $1.1 billion in capital expenditures into the ground to achieve its oil production goals. It will use fewer rigs but accomplish more with them: its drill times, thanks to innovation, have improved by 47% over the last three years. And these rigs will be focused “almost exclusively” in DeWitt County, its most productive play in the Eagle Ford shale.
Other drillers are doing the same. Innovation, design improvements, efficiencies, and a relentless focus on the most productive plays will see to it that production continues to rise, despite the plunging rig count, despite the evaporating capital expenditures, despite the layoffs.
They will lose money. They have a lot of debt because the fracking boom was funded by debt. To stay alive, they must meet their interest costs. But if they slow down drilling, and production tapers off in line with the steep decline rates of fracked wells, their interest costs might eat up 50% or more of their shrinking operating profits, and the risk of default would soar – turning off the money-spigot entirely. Default might be next.
This is the bitter irony: drillers are hoping that rising production achieved with greater efficiencies allows them to meet their interest costs; but rising production pressures the price of oil to a level that may not be survivable long-term for many of them. They can lose money, burn through cash, and keep themselves above water through asset sales for only so long. And this is the terrible fracking treadmill they’ve all gotten on and now can’t get off.
In Canada, the floodgates opened in December. Perhaps it had something to do with oil, Canada’s number one export product, whose price plunge has triggered extensive bloodletting in the Canadian oil patch. Or perhaps foreign investors got spooked by something else. Read… Money Is Bailing Out of Canada
- advertisements -



In other words, Devon is counting on there being a market for their oil, otherwise why not slow production to stabilize the price of oil? So what are they seeing that is not being reported upon? Answer: The growing M.E. crisis and imminent oil cut off from that region due to ISIS and Iran.
President Obama is working diligently to blow up the M.E. by kneeling the ball, patience fellow oil company people, all that oil that is currently being imported will cease to be in competition and the WTI ($51) / Brent ($60) oil price differential is going to change who supplies oil to the East Coast Refiners. Currently most of the oil for the East Coast of the US comes from the M.E. governed by the price of Brent oil. Look at the spread, it doesn't take a genius to see what's going to happen shortly.
If you listen very closly, you can hear that rumble from the South..
"I'm gonna buy a bigger truck"
they spent 6 billion buying that sweet spot!! Also they restructured their portfolio to focus mostly onshore domestic, right? They have clipped their own wings with little opportunity to spend cap ex at the edge of the forward curve. It would seem they are on the shale convayer belt and there's no way off unless you have quality longer cycle time projects. Its not a portfolio if all the assets look the same.
I am getting pop-ups with Prius sale adverts.
Nobody wants to lose the acreage they leased. If you drill and produce, you can hold the lease, otherwise you lose it. Simple as that.
The real interesting sector is refining. They finally have some margins to make a few bucks.
Production was 98,000 Boe
That Boe stands for "Barrels of oil equivalent". If you believe they were pumping oil, I have a bridge to sell you.
This is what Elvis had to say about it:
https://www.youtube.com/watch?v=6Rtz8jY0e0I
And Orbison:
https://www.youtube.com/watch?v=h9JArvEJ64M
The banksters need to repay us.
Translation; Buy all the Oil ETF's you can,right now,because when companies like Devon have tapped all the high production wells out,there will be no marginal wells left,and oils going back to the moon..
Yes we understand there's momentum that has to be dissipated, and the adjustment period is on the order of a year or so, the time it takes a fracked well to start declining.
A lot of those loans and IPOs will just be repaid early, not yield the promised return, or even lose a little because they planned to produce against $80/barrel prices. The problem is just as bad or worse with the offshore rigs that are very high cost to establish and were supposed to pay off over many years.
But a lot of these can and will be shut down early, to optimize marginal costs. Market will probably oscillate like crazy for a couple of years. 2015 may have a glut and no more places to store it, but that will be very short lived if it occurs at all, weeks or months at most.
If you feel chilled, burn a little more of this cheap oil, you'll feel much better.
The biggest user of oil is the US navy - no reduction in demand there, I am sure. How much oil do container ships burn in a year, when they are operating?
I believe the Chinese (future masters) will be buying into the US Shale business for pennies on the USD.
Perhaps this is a payoff to some "shadow" defaults with the Chinese like we saw with Manhattan Real estate where JP Morgue-an HQ was sold for $0.60/$1.00, which has a tunnel directly connected with the FED's HQ and trading desk.
I'm glad the the LORD is ultimately in control, for He leads by example (as true leaders actually do) and what He says is always true, for He cannot lie and His yoke is easy and His burden is light and His love is pure.
Now there's a twist I didn't see coming. lol
Never fear, there will be those waiting in the wings to purchase anything worthwhile upon default.
Epic!
We boiled some folks in an oil bubble.
The odd thing is that capital expenditures for oil drilling worldwide have exploded since 2000 but production has only increased a mere fraction. Maybe Devon Energy, despite its efficiencies, is just showing an extended lag. So 82% in 2014, 25% in 2015, negative in 2016.
"capital expenditures" LOL, denominated in confetti money, no wonder the nominal amount is higher d'oh. Everybody wants to know why oil is declining, nobody is asking why it was at $100-$140 in the first place. Free money!
so there is shale-bubble with delayed inflation.
put air in today, it will inflate next year, and pop the year after that.
If the US doesn't produce as much as it consumes, why should anyone here in the US curtail production? How stupid is a $10 differental in the pice of world oil and US oil when we are importing 35% of the oil we consume on a daily basis?
We primarily import heavy crude which is lower priced than Brent crude, which is the world benchmark. We import the heavy crude because our gulf refineries are set up to refine heavy crude. Much of US drilled oil is light crude, which we havent' the capacity to fully refine in the US. We would just export it as crude but we have a law against it. So we use a loophole where we partially refine it, and ship it as refined only to be fully refined when it reaches its destination.
True but those refineries were retrofitted back in the 80s and 90s to process the sludge, they originally processed mostly light sweet produced locally or from the ME. Now the problem isn't that they can't process the LTO, it's that they haven't gotten enough volume of it to produce on it's own but that time is coming. The WR Grace company has a new catalyst that improves the processing of the LTO so it's feasible to use the LTO here in the US. I think we will see more refineries converting their process back to the LTO because it's a lot cleaner to use than the sludge from the ROW. It does produce a different product mix than sludge and so that is a marketing issue but petrochemical companies refiners will adjust to the most convenient product and that is going to be LTO.
It's complicated.
"if they slow down drilling, and production tapers off…. their interest costs might eat up 50% or more of their shrinking operating profits, and the risk of default would soar"
Especially since many of those loans were granted on short terms which will not be rolled over at the same low rates as default risk rises.
Housing; oil; agriculture; pick any industry you like. Behind every major mal-investment and financial catastrophe lies a mountain of cheap debt. And this time, like every time, the central planners and the Fed never saw it coming.
99 cent gasoline! Last time I can remember that was 1997.
I hope the whores of DC are using some of the Fed's funny money to fill the Stratigic Oil Reserve tanks? Pump it out of the ground, then put it back in. Reminds me of "hole digging" in Cool Hand Luke.
No, the Feds are thinking "Gasoline is cheap, lets raise the gas taxes"
Incorrect.
http://www.reuters.com/article/2014/03/12/us-usa-energy-reserves-idUSBRE...
It's all about Russia.
Hardly ever post links but fuck Reuters with a capital fuck!!
http://politicalvelcraft.org/2012/04/11/breaking-reuters-100-owned-by-ro...
All is proceeding as those in the industry have forseen.
If and When the Oil price hikes once more -- its just a question of time, as the Saud move is just political and all those like Koch and Glencore who piled into Oil stocks-- sell of at loss, then we will be back into contango zone on oil for the years to come (unless there is a huge world financial collapse).
But When ? Some say as of this summer....If it comes soon these shale plays could become more self sustaining.
Tipping times!
I actually wonder if we won't see development shift from US shale to other areas of the world where the political risks are significantly higher but capital requirements are lower.
You will definitely get that as the biggest demand for oil is in Asia...
But America does has its OWN energy agenda and in case oil moves up those Shale plays, for good or for bad longer term (ecology and economy wise), will get replayed. America has made that choice.
In case the world does de-dollarise fast (next 5 years) the US will have no choice BUT to go LOCAL for energy, for geo-strategic reasons, even if it means introducing tariffs to protect that industry (oh the irony if it comes to that!).
I believe this is what you call "putting lipstick on the oldest and ugliest of pigs" before slaughter!
Devon is a very small drop in a very large bucker. Once a well is completed, of course they will keep pumping, duh. However, the U.S. is still consuming over 18 million barrels per day in order to simply maintain the status quo. Oil has tremendous value, especially in terms of living standards. With 7+ billion and growing, there is plenty of demand. How somethng is "priced" is another matter entirely.
So Gail Tyverberg's predictions of "the end of oil" featured by ZH for the last six months, were complete and total bull shit.
Surprise, surprise.
Gail Tyverberg's core position is about Population Control. Fossil fuel crisis are simply the convenient distracting argument used to put the needle in without the patient noticing.
A few interesting points, but clearly written by an 'oil short'. The 'fracking oil short' position had been 'steep decline rate' and need to keep drilling more expensive wells. Even to the point of fracking disappearing within a few years. But now we are painted a picture of substantially less drilling - but more production? So fracking wells are now 'too good'?
If you were to rank order producers from "worst" to "best" you'd probably see the lowest quartile average half the production of those clustered around the midpoint from plays with similar prospects. Similarly, you'd probably see the highest quartile of producers average something like fifty percent more production than those clustered about the midpoint, again from similar quality plays. Devon is a good producer but note that they're circling the wagons around their "core" or highest quality areas in order to make this happen.
What he is saying is that recovery methods continue to improve,
and the Eagle Ford is a monster field.
Buy The Fucking Drill!
Obamanation I say boy what a fubermemtal transformation he is accomplishing we are headed to a third world nation and it has accelerating
Reggie: If you did not have cover from the press, your secret wold be out.
Zero: You mean that we are gay?
Reggie: No, that you are a secular muslim with a communist education.
Zero: Ha! It's too late for America! I'm importing millions of diseased immigrants and giving them 20,000$ each in tax money! Then, there is my newest plan: import hundreds of ISIS operatives disguised as 'Syrian Refugees. Trust me, Reg, this place is going to blow apart before I leave- if I decide to leave! I'll be back, I have to go see ValJar and get my orders.
Who is voting you down? Everyone knows that PRESIDENT PIMP is a homopedo who wanks off to videos of isis homopedos beheading little children.
somebody is going bk- canada?
Drop baby drop. Stay there for a few months. And then watch it sky rocket when something bad happens in the Middle East. Repeat as directed by TPTB.
The problem with this approach is the inability to turn a ture economic profit even at $100 oil. I have yet to see a 10-K that does not show massive cash flow problems, a debt explosion, and depreciation schedules that do not reflect the true ultimate recovery rates. Correct the errors and you have a sector that has been engaging in capital destruction for nearly a decade. If you want to take advantage of a Middle Eastern crisis you are better off looking at the conventional players of tar sands companies that have already built their mines and upgraders and don't need to go to the capital markets for funding. Or better yet, pick up the good coal companies that surive the current collapse.
I disagree, long term. The price of coal will eventually slightly exceed the cost of ordinary rock.
Yup, same as with Greece. Whomever knows the timing of all these on again/off again leaks are making their quarters.
The price of the prime input to the economy - energy - will keep dropping? What a fucking disaster!
Houston-based ConocoPhillips (NYSE: COP) received a ratings downgrade to "negative" from "stable" in the midst of the ongoing oil slump.
http://www.bizjournals.com/houston/blog/drilling-down/2015/02/conocophil...
So, ah, will it get to 55 again? Drop to 30? Just keep falling? Shoot the moon?