ROCKMAN wrote:So saying they'll wait several months falls into the category of BAU. More important: did they say exactly how many wells they are INTENTIONALLY delaying? And even more important: why are the fracs being delayed?
They said the reason they are delaying well completions is because the WTI price is too low. They want to hold out for $65 WTI before fracking them. As for the number of wells that are intentionally delay, EOG said 85 out of 285 delayed wells were intentionally delayed this year. I am not sure how much of that 200 is intentionally delayed from last year vs BAU. But they later upped the total delayed number to 320. I would interpret this as 120 "intentionally delayed" wells this year, plus 200 delayed ambiguously.
The largest U.S. shale producer to fracklog is EOG Resources (EOG). It started 2015 with 200 uncompleted wells and announced it would “intentionally delay” about 85 more wells this year.
Fracklog Threatens to Put a Lid on Oil PricesWilliam Thomas (EOG Chairman; CEO): We have also stated that we have no interest in accelerating oil production at the bottom of the commodity price cycle. Instead, we are drilling but deferring completions on a significant number of wells known as DUCs until oil prices improve. It is the right business decision to drill the wells and defer completions instead of buying out drilling contracts or growing oil in a low price environment. By deferring completions and accelerating oil growth in a better price environment, we maximize 2015 return on capital invested, and build momentum as we head into 2016. We plan to enter 2016 with approximately 285 DUCs. If oil prices recover and stabilize around $65 WTI, EOG can resume strong double-digit growth with a balanced CapEx to discretionary cash flow program.
Douglas Leggate: Bill, I wonder if I could touch on your completion strategy? What would you need to see in order to re-up the dates of completions to match your drilling pace? On a related question, the backlog you've talked about coming out of 2015, what kind of pace would you expect to move those toward production?
William Thomas: Yes, Doug, thank you for the question. The reason we have deferred the completions is to really substantially increase the rate of return. So as we go forward this year, it is really important for us to be patient and allow the process to continue to firm up. As I have said, the first $10 in oil price increase with a six-month deferral is a $300,000 net PV add to a typical well. So we want to make sure that we allow prices to firm up and that the prices will continue to be firm and not short term.
And then as you see, we are getting significant cost reduction as we go forward. We are gaining on that every day, and we are gaining on well productivity as we go forward. We do not want to get in a hurry. We want to stay disciplined. We certainly don't want to jump start completions and the price maybe fall back. So if the forward curve continues to stay firm, then our plan, as we've said, is to begin completing wells in the third quarter. We will really look at what the outlook on 2016 prices are. That is what we are targeting, and that is what we are really focusing on. So we will just continue to watch the fundamentals. And certainly we want to be convinced that they are strong going forward. And we will really make the call for the third-quarter activity probably in July or so, after we get a little more data.
Douglas Leggate: So just to be clear on the pace. I mean you can obviously bring those completions back very quickly and turbocharge your growth.
I just don't know how EOG has defined the pace. But would you plan to have the backlog reduced to a level that was equivalent to your current drilling rate within a period of time? Can you walk us through how you might think about that? Just trying to see what the upside is to the growth outlook when you go back to completing those wells.
William Thomas: Yes. I guess the answer to that, Doug, is we are going to be really patient and disciplined about it, and kind of gradually increase the activity as we go forward making sure that the price is going to hold up. And we really do, as a Company -- you know EOG. We are very, very focused on returns. So every time that price increases a little bit, and every time we get the productivity of wells up and get the cost down, we're making higher returns. So there is no use pushing that too quickly.
The ramp-up will be, as we talked about, the production shape is going to be U-shaped this year; and the second and third quarters will be the low point. But the fourth quarter, with the current plan, is to ramp up production growth and be heading into 2016 on a very strong note.
Paul Sankey: Sorry to press on the drill down completed. But I guess a follow-up is trying to get a sense of the pace at which the 285 would come back relative to how much drilling you would do simultaneously. I think what you're saying is at a $65 plus price, you would be ramping up the DUCs or the drilling, both simultaneously? Can you just go into that again? Thank you.
William Thomas: Yes, Paul, that is a good question. And as we head into the last half of this year and think about 2016, we will be on a pretty good uptick. So what we want to do is get the equipment and the people in place and get the process started, certainly very strongly in the second half of the year. Then when we hit 2016, if oil prices continue to hold up, we will continue to increase activity accordingly.
Of course the goal is, and the plan is, to continue to remain CapEx to discretionary cash flow balanced. So that will really govern our activity. The stronger the price of oil is, the more, obviously, capital we'll have to work with; and the more we will continue to increase our activity.
As we look at the second part of this year, part of the process we'll be evaluating is how many drilling rigs to continue to have drilling wells versus releasing rigs. And that certainly will be a function of what the oil price is. We won't get too far out in front on the drilling side. The 285 DUCs that we start the year with, most likely over the first half of the year we'll reduce significantly as we go forward. We will exit the year next year with considerably less DUCs than we are exiting this year with.
Paul Sankey: Yes, I think I understand. To reinterpret, the closer you are to $65, the more DUCs will be used to generate the double-digit growth. But what you are essentially saying is if you're $65 or above, you will be delivering double-digit growth next year.
William Thomas:Yes, I think that's correct. Yes.
William Thomas:The reason that our guidance on the second quarter is down is because we have had a significant reduction in the amount of wells we complete. That is really the driver. We were down 39% in completions in the first quarter. And then in the second quarter, we are down an additional 36%. And that is really just the process of deferring the wells and not completing the wells, and just really taking off the spin rate as we move into the second quarter. So that is just driving it.
EOG Resources (EOG) Earnings Report: Q1 2015 Conference CallWilliam Thomas: our projected year-end uncompleted well inventory has increased from 285 to 320. Many of you are asking, when will EOG grow oil again? We have said all along that we do not want to grow production until we see the oil market is firmly rebalancing. We will be watching the supply-demand fundamentals in the second half of this year closely as we determine our plan for 2016. Currently, we intend to spend within cash flow. The capital efficiency gains we have made this year, along with our large high-quality inventory of uncompleted wells, positions us for an excellent 2016.
The second thing is that, as we've talked about, we have a very large, now 320 -- estimated 320 uncompleted well inventory that will be very high quality. I think it will be the highest quality inventory of any operator in the US, and that inventory is ready to complete -- to begin completion early in the year next year. We have infrastructure in place for all of that uncompleted inventory. So that won't slow us down.
Gary Thomas (COO): Would we just grow production? We're not inclined to grow production just in the continued low-price environment. But like Bill is saying, we're very well-positioned with all of our high-quality ducts, wells not completed. In order to go ahead and lease maintain, possibly grow production depending on what the prices are, we will start with quite a number of completion units. That allows us to bring production on rapidly.
EOG Resources (EOG) Earnings Report: Q2 2015 Conference Call Transcript