CME NYMEX crude oil prices were down again yesterday – with the West Texas Intermediate (WTI) contract closing at $46.39 down $2.30 over the holiday weekend and over 55% lower than its high 7 months ago in June 2014. Some are billing the free fall in crude prices as a showdown between U.S. shale producers and OPEC. That is because OPEC has apparently decided not to cut production to prop up prices in an over supplied market in hopes that lower prices would squeeze out U.S. shale producers. If that was the strategy then it isn’t working so far. Today we review crude producer plans for 2015 and find lower capital expenditure budgets and cuts in rig deployment contrast with expanded production.
Yesterday we posted Part 2 in our series on producer breakevens and drilling economics in which we explained that despite the price crash, we expect production to continue increasing in the short term and provided four reasons why. The first of those reasons is the theme of today’s blog, namely that producers are cutting back drilling, but the rigs that are left are focused on their highest yield “sweet spots”, the best, largest producing opportunities. Producers are cutting their budgets and reducing rig counts but still hope to maximize production to increase cash flow to pay down debt and finance new production.
We found very compelling evidence that this is what producers are thinking in investor information compiled by our good friends at US Capital Advisors. Table #1 is a list of 24 U.S. independent producers (primarily oil focused) that published information regarding three metrics - capital expenditures (capex – columns C and D in Table #1), rig counts (columns F and G) and oil production (columns I and J). In each case the data is for 2014 (actual or estimated) and a forecast or “guidance” number for 2015. We will get into some of the details in a minute but first we focus on the totals for each metric (row 26 in Table #1).
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About the song
“River Deep, Mountain High” was written by Jeff Barry, Ellie Greenwich and Phil Spector and appears as the first song on Ike & Tina Turner’s sixth studio album of the same name. Recorded at Gold Star in Hollywood, with Phil Spector producing, it was originally released as a single on Spector’s Philles label in May 1966. It only went to #88 on the Billboard Hot 100 Singles chart, a huge disappointment to everyone involved, especially Spector, who considered the song a masterpiece and a perfect follow-up showcasing his “Wall of Sound” that had been so successful with his 1965 hit with The Righteous Brothers and “You’ve Lost That Loving Feeling.” Due to the lack of success with “River Deep-Mountain High,” Spector withdrew from the music business for two years, beginning his personal decline and problems with substance abuse and mental health.
Since its original release, the song has been inducted into the Grammy Hall of Fame, The Rock and Roll Hall of Fame’s “Hot 500 Songs that Shaped Rock and Roll” list, Rolling Stone's “Top 50 Songs,” and NME’s “500 Greatest Songs of All Time” list. It has been covered by several artists including Eric Burdon & The Animals, Deep Purple, The Supremes, The Four Tops, Erasure, and Celine Dion. Personnel on the record were: Tina Turner (lead vocals), Leon Russell, Michael Rubini (piano), Jim Horn (sax), Barney Kessell, Glen Campbell (guitar), Carol Kaye (bass), Frank Capp (percussion), Darlene Love, Fanita James, Jean King, Gracie Nitzsche, Clydie King (backing vocals), and Jack Nitzsche (strings). The track cost $22,000 ($184,000 in 2021 dollars) to produce and used 21 session musicians. Spector made Tina Turner sing the song over and over for hours before he felt like he had the perfect take. Spector said that he had invited Ike Turner to play guitar on the song, but he failed to turn up for the session.
The album River Deep, Mountain High was recorded at Gold Star in Hollywood in March 1966 with Phil Spector producing. Its U.S. release was canceled by Spector after the failure of the single. It was released in the UK in September 1966 and went to #27 on the UK Singles chart. Dennis Hopper shot the album cover photo. The album was eventually released in the U.S. on A&M Records in September 1969. It went to #28 on the Billboard R&B Albums chart and #102 on the Billboard 200 Albums chart. Three singles were released from the LP.
Ike & Tina Turner were an American rock and roll/R&B duo active from 1960 to 1976. They released 22 studio albums, eight live albums, 31 compilation albums, two soundtrack albums and 70 singles. They won two Grammy Awards and were inducted into the Rock and Roll Hall of Fame in 1986.
Tina Turner (Anna Mae Bullock) was an American singer, dancer, actress and author. Referred to as the “Queen of Rock and Roll,” as a solo artist she released 10 studio albums, two live albums, six compilation albums, two soundtrack albums and 72 singles. Her career spanned over five decades. She has been featured in 15 motion pictures, including documentaries, and wrote four autobiographical books. She won 12 Grammy Awards and a Kennedy Center Honor, and was inducted into the Rock and Roll Hall of Fame as a solo artist in 2021. Tina Turner died in May 2023 at the age of 83 — her passing was the top story on the evening news.
Ike Turner (Izear Lester Turner) was an American musician, band leader, songwriter, record producer, and talent scout. In 1951, his first recording, “Rocket 88,” credited to Jackie Brenston and his Delta Cats, is a contender for the distinction of the first rock and roll record released. As a solo artist, he released 10 studio albums, two live albums, 25 compilation albums, and 30 singles. He received one Grammy Award, one Blues Music Award, and is a member of the Blues Hall of Fame. Ike Turner died in December 2007 at the age of 76.
We at RBN are saddened to learn of the recent passing of iconic legend Tina Turner. We send our sympathies and condolences to her family, friends, and fans.
Comments
This analysis isn't especially helpful as it regards production because it is looking at 2014 average production as opposed to 2014 year end exit production. The e&p co's are all heading into 2015 with a significantly higher production rate than the 2014 average, which explains a lot of the discrepancy in the numbers you are analyzing.
In reply to Need to look at year end run rate production by Unknown Unknown
Continental as an example.
What will rise by 18% is the yearly average bbl/day. Oil production rose from about 100k bbl/day end of 2013 to an exit rate of 140k in 2014 averaging roughly 120k as day. CLR is therefore saying that they plan to keep production flat @ 140k bbl/day for 2015. In order to do that, they are planning 280 new wells. (CLR is 70% Oil, 30% NG) at a cost of $2.7 B. To keep production flat. It is sobering. In the present price environment they will have a cash shortfall of about $1 billion. Yikes. Obviously were they to live within cash flow, they would suffer a production drop.
Although there are probably some efficiency gains, don't you think one of the reasons that production will increase in 2015 compared to 2014 was some of the 2014 investment went to wells that only started producing in late 2014. A better analysis might be to compare December 2014 monthly production to the average monthly production in 2014. I believe you will find that it is greater. Then compare December 2014 monthly production to the average monthly production in 2015. Now I suspect that you will see production being flat or declining. Eventually we will need to compare December 2014 monthly production to December 2015 production to see the impact of reduced capital spending and rig count.
Expecting increased production in 2015 with a declining rig count is a fantasy. The Achilles heel of the tight oil plays is their deplection rate. The initial production of new wells in 2015 will not offset the decline curve of wells drilled through 2014. A comparison of annual rig count versus annual production increases will support this prediction.
Let me get this straight: These prudent operators were NOT drilling the sweet spots in their leases when oil prices were high but they are NOW drilling the sweet spots when oil prices have crashed. Many of the hedging programs of these companies are limited and any increases in production in 2015 will receive current oil prices.
Oil is in fact "The Prize" but it is also a commodity and in commodity businesses it is the low cost producers that survive steep price declines. Many tight oil companies are not low cost producers and have had to rely on additional debt and stock offerings to keep increasing their revenue.