US oil and shale output – Oct 2018

Published at 17:32 3 Jan 2019 by

US total liquids production averaged 17.29 mb/d in October, higher m/m by 52 thousand b/d and y/y by 2.42 mb/d. Crude output increased m/m by 79 thousand b/d to 11.54 mb/d, up y/y by 1.83 mb/d, which was slightly higher than our forecast of flat m/m production based onstorm-related outages in the Gulf of Mexico (GoM). While GoM output fell m/m, the decline was less than our anticipated decrease of 0.12 mb/d m/m (based on BSSE data), underpinning the difference in our projection versus the final October figure. The overall m/m increase was driven by New Mexico (+33 thousand b/d), North Dakota (+31 thousand b/d), and Colorado (+22 thousand b/d). NGLs output was 0.56 mb/d higher y/y at 4.58 mb/d, easing back from September’s record.

Onshore basins performed well in October, led by the Permian, although the pace of m/m growth has continued to ease for the second straight month (and returned to more normal levels) after the August surge that spooked the market. Texas and New Mexico (a proxy for the Permian and Eagle Ford) crude output rose by 51 thousand b/d m/m and 1.18 mb/d y/y to 5.47 mb/d. Colorado and Wyoming production (a proxy for the Niobrara) rose by just 14 thousand b/d m/m to 0.75 mb/d with gains in Colorado partially offset by a dip in Wyoming. Output in Oklahoma and Kansas (proxy for the Anadarko basin) rose by 3 thousand b/d m/m to 0.67 mb/d (+74 thousand b/d y/y).

After a promising first three quarters of 2018 that saw E&P producers register strong growth, debt reduction and improved returns, Q4 18 is likely to have experienced a sharp reversal as WTI fell by 14% q/q, or 42% from peak to trough. Very few operators are likely able to generate free cashflow using the current forward curve. With oil prices in the $40s, operators have a stark choice: materially outspend cashflow (likely to be punished by investors) or reduce activity levels. Thus, as 2019 programmes are rolled out, we believe operators will reduce activity levels to rein in cashflow outspends. This has led us to reduce our 2019 production forecasts by 0.11 mb/d. Indeed, key Permian operators, Diamondback, Parsley and Centennial offer a glimpse of what may come. Diamondback reduced Capex by 10% and plans to immediately drop three rigs and two frac crews. Parsley Energy plans to deploy 12–14 rigs and 3–4 frac crews, compared to 16 rigs and 5 frac crews in Q4 18. Centennial has revoked previous plans to add 2–3 rigs in the Permian in 2019. That said, we still believe crude output will grow by at least 1.2 mb/d this year as the involvement of IOCs will make US production less responsive to prices and the new Permian pipes coming online in H2 19 have large committed volumes that will ensure production even if flat price is low.

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