American Oil and Gas Reporter - January 2016 - 45

Outlook 2016
We believe capex will bottom in fourth
quarter 2015/first quarter 2016, and we expect this recovery will be similar to others: North America will rebound first
and the strongest."
Part of its reasoning, Evercore outlines,
is the favorable hedges with which many
large operators entered 2015. It estimates
some operators had half their production
hedged at $90 a barrel, "allowing them to
increase their realized price for oil by almost $20 a barrel through third quarter
2015. Looking to 2016, this trend should
subside as hedges continue to roll off. On
average, operators hedged 41 percent of
their 2015 production; for 2016 that numbers falls to 24 percent."
Price Sensitivity
Evercore's own price projection for the
average barrel of WTI this year is $60, but
it says the companies in its survey budgeted on an average of $47.60 a barrel. Evercore says the average price that would
prompt higher spending is $63 a barrel, and
it adds, "Nearly 60 percent of respondents
note they would increase budgets if oil
prices reach levels between $60 and $65,
with one-third citing $65 as the price that
will spur additional investment."
This compares with the Survey of Independent Operators, in which 26.5 percent
of respondents indicate they would increase
their 2016 drilling plans at a WTI price of
$60 a barrel (Figure 2A). That number
jumps to 54.5 percent who would drill more
wells at $65 a barrel, 70.5 percent who
would increase drilling at $70 a barrel, and
89.4 percent who would drill more at $80.
Conversely, Evercore reports more
than half of the companies it surveyed
would decrease spending at $40.00 a
barrel WTI, while an additional 28 percent
would back off below that level.
About a fourth of respondents to
AOGR's survey say they will dial back
their drilling plans at $47.00 a barrel. That
grows to exactly half at $42.00 and
reaches three-quarters at $37.00
For natural gas, Evercore says its companies budgeted for a 2016 average price of
$2.63 an MMBtu. It reports 34 percent will
increase their capital outlays if prices reach
$3.25 an MMBtu, and three-quarters will
spend more by the time gas prices rise to
$3.75. On the downside, Evercore reports 24
percent will cut back at $2.25 an MMBtu,

rising to 82 percent at $2.00.
The Survey of Independent Operators shows drilling plans starting to tick upward between $3.50 and $3.75 an Mcf,
where a cumulative 22.2 percent of respondents say they would drill more wells (Figure 2B). That jumps to 48.6 percent at
$4.00 and to 76.4 percent at $5.00. Going
the other way, only 21.6 percent of AOGR
survey respondents would decrease gas
drilling at a price of $2.25 an Mcf, but that
spikes to a whopping 64.9 percent at
$2.00 and 89.2 percent at $1.50.
Oil And Gas Production
Since OPEC chose in November 2014
to defend market share rather than crude
oil prices, the burning question has been
how soon and by how much would lower
prices affect U.S. production, which arguably has proven much more resilient than
OPEC and many analysts anticipated.
By year-end, however, there were strong
signals the slowdown had begun. In its

Weekly Petroleum Status Report for the
week ended Dec. 4, EIA reported total domestic production of 9.164 MMbbl/d,
38,000 bbl/d less than the week before and
434,000 bbl/d less than the April 2015 peak.
EIA's Short-Term Energy Outlook for
December anticipates U.S. crude oil production will continue to decline to an average of 8.95 MMbbl/d in first quarter
2016, on down to 8.80 MMbbl/d and 8.56
MMbbl/d for the second and third quarters, respectively, before rebounding to
8.75 MMbbl/d in fourth quarter 2016.
For the first time this year, the Survey
of Independent Operators asked respondents
how their first quarter 2016 oil and gas production would compare with first quarter
2015. The answer was 6.2 percent less crude
oil and 7.7 percent less natural gas.
That response compares favorably with
EIA's calculation that first quarter 2016
crude oil production will be 4.7 percent less
than first quarter 2015's 9.37 MMbbl/d, but
is counter to EIA's natural gas calculations

FIGURE 3
Change in 1Q2016 Oil & Gas Production
Compared with 1Q2015
Natural Gas

Crude Oil

-6.2

Total

-7.7

-8.6
Gas
-8.4

-4.3

Oil

-7.3

+1.9

Category 2

-3.8

-8.1

Category 1

-9.1

-10

-8

-6

-4

-2

Percentage Change
Category 1 respondents are those that plan to drill between zero and five wells in 2016.
Category 2 respondents will drill six or more wells in 2016. Respondents included in
the "oil" category targeted crude oil on more than 50 percent of their 2015 wells, while
"gas" drillers targeted natural gas on at least half of their 2015 wells.

JANUARY 2016 45

American Oil and Gas Reporter - January 2016

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