As U.S. energy producers scramble to secure new reserves to boost stagnant or declining oil and gas production, they're having to shell out ridiculous amounts of cash.
According to Ernst & Young's latest U.S. oil and gas reserves report, the largest U.S. energy companies spent more money on exploration, development, and acquisition spending last year than in the entire history of the accounting firm's oil and gas reserves report.
Let's take a closer look at the capital spending numbers and determine whether or not they're consistent with individual company's experiences across major U.S. oil and gas plays.
The energy spending bonanza
According to the E&Y study, which analyzed spending and performance data for the 50 largest U.S. energy companies, total capital expenditures soared to a record $185.6 billion last year, up a whopping 20% from 2011 levels. Exploration spending among the 50 firms also rose by 20%, coming in at $26.3 billion last year.
Meanwhile, development spending increased 21% over the previous year to $103.4 billion, while acquisition spending rose 17%. Despite spending record amounts of cash, however, upstream companies reported a sharp drop-off in after-tax profits last year, due primarily to low natural gas prices.
The increase in exploration and other spending can be attributed mainly to increased activity in U.S. shale or "tight oil" plays. To combat declining output from older oil and gas fields, energy companies are increasingly turning to shale resources, where oil and gas are trapped thousands of feet below dense rock formations.
Costs in the Bakken
Though U.S. shale plays have massive hydrocarbon potential, coaxing oil and gas from these formations is no easy task and comes at an extremely high cost. Take North Dakota's Bakken Shale, a vast rock formation spanning North Dakota, South Dakota, Montana, and parts of Canada, which has some of the highest operating costs of any shale play in the U.S.
Bakken operators routinely spend more than $10 million to drill and complete a well. Much of that sky-high cost is due to wells that have to be drilled several thousands of feet deep, as well as harsh weather and relatively undeveloped pipeline infrastructure in the region.
However, there are some promising signs that operating costs in the Bakken are actually coming down for dozens of operators, due mainly to more efficient drilling methods. For instance, Continental Resources (NYSE: CLR ) , the Bakken's leading producer, has lowered its well costs by about 10% from last year's average and currently spends about $8.3 million to drill and complete an average well.
Similarly, Newfield Exploration (NYSE: NFX ) said that it's currently drilling and completing wells in the range of about $8 million-$8.5 million, even recently completing a best-in-class well for $7.4 million. That's a massive improvement over the company's average first-quarter gross completed well cost, which came in at $9.8 million.
Oasis Petroleum (NYSE: OAS ) is another Bakken operator that has made impressive progress in slashing costs over the past year. In early 2012, the company was shelling out about $10.5 million per well. But as of the first quarter of this year, it managed to reduce costs to just $8.4 million per well – a feat it attributed to lower service costs, efficiency improvements, and the increased usage of pad drilling methods.
And last but not least is Kodiak Oil & Gas (UNKNOWN: KOG.DL ) , a company whose operations are almost exclusively focused in the Williston Basin. Though Kodiak pays more per well than the aforementioned firms since its wells tend to be much deeper, it too managed to bring well costs down to the $9.7 million-$10.2 million range, a roughly 15%-20% reduction from year-ago levels.
The bottom line
As you can see, even though exploration, development, and acquisition spending among the companies surveyed by Ernst & Young rose to a record level last year, that data doesn't capture the nuances of individual shale plays. In addition to the Bakken, dozens of operators have reported staggering efficiency gains in other major shale plays, such as the Eagle Ford and the Marcellus, which have helped contain expenses.
The aforementioned Kodiak, for instance, has reported major improvements in lease operating expenses, days of spud-to-rig release, and other important metrics, in addition to reduced well costs. The company is no doubt a dynamic growth story – it offers tremendous opportunities, but with those opportunities come great risks. Before you hitch your horse to this carriage, let us help you with your due diligence. To find out whether Kodiak is currently a buy or a sell, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started simply click here now.