After months of speculation about what oil price would break the back of shale drillers, we finally have that number: $30 a barrel. At least that's the price at which Bakken shale drillers Oasis Petroleum (OAS), Whiting Petroleum (WLL) and Continental Resources (CLR -0.80%) can no longer keep drilling in the oil play that really turned around America's oil production. That was abundantly clear after reviewing their plans for 2016, with each company basically winding down operations in the Bakken and letting nature slowly take its course on their production.
Capex budgets gutted
Continental Resources was first out of the gate with its 2016 capex budget, releasing it nearly a month ago. That plan called for the company to slash spending by 66% year over year to just $920 million. That spending level would enable the company to basically live within its projected cash flow assuming an average oil price of around $37 per barrel.
Oasis Petroleum, likewise, is gutting its 2016 capex budget. After spending just $610 million in 2015, down 61% year over year, the company is cutting even more, with plans to spend $400 million in 2016. However, just half of that will actually be spent on drilling and completions, with the rest being earmarked for investments in midstream assets and other capital needs. That $200 million spending level, however, is expected to be fully covered by cash flow at about a $35-per-barrel oil price.
Whiting Petroleum will see the deepest cut, with its capex budget dropping 80% year over year to $500 million. What's interesting about that is that the company expects to spend all but $80 million of that in the first half of the year to complete projects started in 2015 so that it can wind down completion operations in the Bakken.
Nature begins to take over
The net result of these significant spending cuts will be a steep year-over-year decline in production for all three companies. After averaging production of just over 221,700 barrels of oil equivalent per day, or BOE/d, in 2015, Continental Resources expects its production rate to slip 10% to an average of just 200,000 BOE/d in 2016. An even more startling drop is in store for its exit-to-exit production rate, which is expected to drop from 224,934 BOE/d in the fourth quarter of 2015 to an estimated 180,000 BOE/d to 190,000 BOE/d in the fourth quarter of 2016, or a nearly 18% decline at the mid point. That's a massive shift for a company that grew its production 27% in 2015. This shift is happening because the company doesn't have the cash flow to drill and complete enough new wells to offset production declines from legacy wells resulting from both reservoir depletion and the impact of pressure that's being relieved from the reservoir. In other words, nature is taking its course.
Whiting Petroleum, likewise, expects to see its production decline steeply in 2016. After producing 163,200 BOE/d in 2015, the company expects to produce between 128,000 BOE/d and 138,000 BOE/d, or an 18.5% decline at the midpoint. Again, a big change for a company that grew its production 42.5% year over year, though that's partially due to the acquisition of Kodiak Oil and Gas.
Oasis Petroleum also expects its production to decline in 2016, though not nearly to that extent. After averaging 50,477 BOE/d in 2015, the company expects to produce between 46,000 BOE/d and 49,000 BOE/d in 2016. That's a 6% decline at the midpoint. This milder decline rate is partially due to stronger oil hedges as well as the fact that it intends to complete the wells it drills.
Holding back for better days
One thing that both Whiting Petroleum and Continental Resources are doing this year is that they're drilling, but not completing, or fracking, a growing number of wells. These wells are known as drilled uncompleted wells, or DUCs. As mentioned, Whiting Petroleum plans to wind down its well completion efforts by midyear, instead building a growing inventory of DUC wells until prices improve. Under its current assumptions, the company plans to grow its DUC inventory in the Bakken to 73 by the end of this year, with its DJ Basin Niobrara DUC inventory expected to be 95.
Continental Resources is doing something similar. In fact, it's currently not completing any Bakken wells, and instead it built a DUC inventory of 135 wells at the end of last year, which it intends to grow to 195 by year-end 2016. The only wells it's currently completing are those in its Oklahoma oil plays, which have high enough returns to justify being completed in the current environment.
The advantage of building a DUC inventory is that it enables these companies to take advantage of cheaper rig rates and service crews to put themselves in a position to take advantage of a future improvement in the oil price. Both companies can more quickly complete their DUC inventory when prices improve, enabling them to seize that upside.
Bakken producers have finally hit a wall at $30 oil. That price is forcing them to significantly cut back on spending, so much so that they can't even maintain their production rate. Instead, these producers are working hard to live to fight another day by investing within cash flow and building up a big inventory of wells that can be completed when prices finally improve.