Despite North American oil production picking up in the past few months, the global scene presents a different picture. Inventories and spare capacity in oil producing nations have fallen to a bare minimum. In other words, global crude oil production hasn't commensurately kept up with end demand. As a result, crude oil prices are moving north.
Why high crude prices are here to stay
The current tightening in the market is mainly due to supply disruptions in Libya and Iraq. Because of this, Goldman Sachs expects the internationally traded Brent crude price to hit $115 per barrel any time now. The international benchmark has consistently topped $110 per barrel in the past few weeks. Additionally, according to data available from the Energy Information Administration, crude inventories at Cushing, Okla. -- the storage hub of the West Texas Intermediate -- have declined for the seventh straight week. At 37.4 million barrels, this is a 28% drop, from the record highs of nearly 52 million barrels in stockpiles in January.
This is in tune with the International Energy Agency latest report which shows U.S. oil demand has increased at its fastest pace over the last two years. With the economy showing signs of recovery, the energy watchdog expects U.S. oil consumption to increase for the rest of the year.
Still, it must be kept in mind that global supplies are expected to remain tight in the long run due to increasing demand from emerging economies. In fact, energy research firm Wood Mackenzie expects China to replace the United States as the world's biggest crude oil importer by 2017. With tighter supplies -- thanks to the end of easy oil -- and higher demand, oil prices are likely to take an upward trajectory.
Who could benefit from high oil prices?
Obviously, exploration and production companies have a solid advantage here. However, the best positioned ones are those with access to larger and strategic resources, as well as maintain a cap on costs incurred. Operators having lower costs of development on a per-barrel basis hold a huge competitive advantage.
Of course variations do exist. However, holding large reserves that can be developed at a comparatively cheaper rate translates into superior returns. Houston-based EOG Resources (NYSE:EOG) has done exactly that. An early mover in the U.S. shale oil revolution, EOG's Eagle Ford exposure has ensured the best returns for a U.S. oil company this year. The company's estimated net reserves in the Eagle Ford are in the range of 1.6 billion-2.2 billion barrels of oil equivalent. The best thing about this shale play is that as the lateral (horizontal) length of the fracked well increases, production rate goes up. According to the company's latest investor presentation, average initial production rate per well has progressively climbed to 1,226 barrels per day in 2013 from a lowly 483 bpd in 2009. Well costs are also falling with an average $5.8 million per completed well in 2013 -- a far cry from the $9.1 million spent per well in 2009.
The company's Bakken wells are superior to even those of Statoil and Continental Resources (NYSE:CLR). The four highest producing wells in this region belong to EOG Resources with production ranging between 2,271 bpd and 1,846 bpd. However, Continental has set the benchmark in well economics in the Bakken by averaging $8.2 million in completed well costs. In comparison, EOG Resources completes a Bakken well for an average $9.5 million. With more than 4,900 drilling locations yet to complete in the Eagle Ford, as well as a 12-year drilling inventory in the Bakken, EOG is expected to have the best in class crude oil growth for the next few years.
Anadarko Petroleum (NYSE:APC) is another company which simultaneously focuses on growth as well as value. Unlike EOG Resources, its immediate growth prospects aren't exactly phenomenal, but the net value derived is huge. Along with a solid exposure to onshore U.S. shale resources, the company's Gulf of Mexico operations look promising for the future. Anadarko is focusing on increasing takeaway capacity for shale resources by enhancing infrastructure. The dedicated midstream segment with over 15,000 miles of pipelines and about 2.5 billion cubic feet per day of processing capacity should help improve efficiency and price realizations.
Production from the Wattenberg Shale play grew 37% in the second quarter year over year to 60,000 bpd and management expects to ramp up production to 90,000 bpd by the first quarter of 2014. The Eagle Ford Shale play also figures high on management's radar with more than 2,500 drilling locations identified as costs per well completion move down. This kind of growth should translate into returns. Additionally, the five deepwater discoveries in the Gulf and off the coast of Mozambique are what investors should keep an eye on.
Higher oil prices do not necessarily translate into higher returns for exploration and production companies. However, companies like EOG Resources and Anadarko Petroleum are strategically positioned to take advantage due to higher efficiency and lower costs incurred.