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February 2015 SEE Monthly Brief
Oil Field Services Stress Tested

The drilling equipment and services sector is the first to which oil producers have turned to cut costs after the 50% oil price drop of the last few months. Producers cut costs two ways: by asking for lower costs in ongoing or planned projects and by delaying future capital expenditures altogether. Since shale oil development is particularly capital-intensive, its budget reductions have been large. As just one of many examples, Marathon Oil has announced it will slice its 2015 capital budget to $3.5 billion from a 2014 capital budget of $6.7 billion. Marathon will also reduce its jobs count by 350 to 400, or slightly over 10%.

Overall, according to Collin Eaton in Fuelfix, oil field service companies have already announced 40,000 layoffs and oil producers have announced 5,000.

As Sheetal Nasta argues for RBN Energy, even in a low-price environment a base level of activity continues due to leases that can only be held by production (HBP). HBP means the lease reverts to the landowner if oil or gas isnít produced from it within a certain period of time, often three years. This “forced drilling” increases supply more than would be expected given the low prices for oil and gas. Natal gives the example of increased dry gas production from the Louisiana Haynesville well past the point when it was uneconomic due to HBP lease provisions.

With the extremely high northeastern gas demand now occurring (43.1 billion cubic feet, out of approximately 120 billion cubic feet in the entire U.S. on February 16th), field gas prices are not spiking. Why? According to the Energy Information Administration (EIA) gas supply has already increased an aggressive 11.6% over last year, to 72.8 billion cubic feet per day. On the oil side, with limited demand both globally and seasonally and no ability to export U.S. oil, stored oil has climbed to its highest level ever, 425.6 million barrels. So even with low prices, demand is not mopping up excess supply and drilling will continue to be cut.

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           Copyright 2015, Starks Energy Economics, LLC. This information is confidential and is intended only for the individual named. This information may not be disclosed, copied or disseminated, in whole or in part, without the prior written permission of Starks Energy Economics, LLC. This communication is based on information which Starks Energy Economics, LLC believes is reliable. However, Starks Energy Economics, LLC does not represent or warrant its accuracy. This communication should not be considered as an offer or solicitation to buy or sell any securities.

           I, Laura Starks, do hereby certify that, to the best of my knowledge, the views and opinions in this research report accurately reflect my personal views about the companies and their securities as of the date of this report. These viewpoints and opinions may be subject to change without notice and Starks Energy Economics, LLC will not be responsible for any consequences associated with reliance on any statement or opinion contained in this communication. No Starks Energy Economics, LLC consultant or analyst has nor will receive direct or indirect compensation in return for expressing specific recommendations or viewpoints in this report.

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