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Oil price collapse deals blow to Permian

Plunging crude prices are bad news for US shale, with some producers set to be severely afflicted

Operators in the Permian basin were sent reeling by Opec’s failure to maintain its production alliance with Russia. On 9 March, both Brent and WTI experienced their worst day since 1991, falling by over $10/bl into the $30s. Some Permian drillers have already responded by announcing they will scale back production, although the full extent of the fallout could take months to assess. 

Among the first to respond was US independent Diamondback Energy, which said it would immediately reduce its activity from nine completion crews to six. The company expects to drop two drilling rigs in April as well as a third later in the second quarter. 

Texas-based independent Parsley Energy said it was revising its WTI price outlook for the remainder of 2020 to $30-35/bl, down from $50/bl previously. In response to this, the company said it had approved plans to drop the number of operating rigs from 15 to 12 “as soon as practicable” and would reduce the pace of its activity further in the near term. 

Smaller companies and those with high debt loads are under the most threat

On 10 March, independent Marathon Oil—which is not focused solely on the Permian but nonetheless has operations there—announced it was reducing its capital expenditure budget for the year by at least $500mn. Its revised budget of $1.9bn represents a reduction of roughly 30pc compared with what it spent in 2019. 

Among other moves, Marathon says it will “meaningfully” reduce operated drilling and completion activity in the Permian’s Northern Delaware sub-basin, where it is currently running four rigs and one hydraulic fracturing crew. 

Staying afloat 

Shale drillers had already weathered a downturn by implementing aggressive cost-cutting measures and pursuing efficiency gains. Producers focused on the most productive acreage to maximise volumes and cost effectiveness. 

The Permian fared better than other regions partly because stacked pay zones were more lucrative for drillers even as oil prices languished. However, many producers now find themselves in a more precarious financial position. The struggle for many to stay afloat is also being compounded by the coronavirus outbreak, which is depressing global oil and gas demand. 

The warning signs were already there for non-Permian shale producers such as Oklahoma-based Chesapeake Energy and Colorado independent Whiting Petroleum. Both were already trading at distressed levels prior to the price crash. 

$65bn Expected shale capex reduction in Permian

Smaller companies and those with high debt loads are under the most threat in the Permian. Goldman Sachs stated in a note that bigger players such as Chevron and ConocoPhillips—both of which have Permian operations—are more sheltered from the shock. Heavily indebted Houston firm Occidental Petroleum could be in more trouble. 

Research consultancy Rystad Energy forecasts the shale industry will carry the biggest burden from the supply shock, accounting for up to $65bn of the $100bn E&P capex reduction it expects to see globally. As the Permian accounts for the bulk of tight oil drilling—around 5mn bl/d currently—many more producers in the basin are expected to follow those that have already announced plans to reduce activity. A wave of bankruptcies could follow suit. 

Compounding the woes of Permian producers is the fact that the basin’s production is still expected to keep rising in the near term even as drillers scale back activity. Consultancy Wood Mackenzie estimates it will take at least six months for shale production to ease off. This will contribute to the glut and keep oil prices depressed unless the Opec+ countries restart negotiations and agree on renewed production cuts. 

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