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E & P Operators Focus On Cost Reduction
Most exploration and production companies have a relentless focus on reducing the costs involved with developing oil and gas properties. This is particularly important in many of the onshore unconventional resource plays where supply and demand for oil services is fairly tight. This trend continued in the fourth quarter of 2011 and will persist in 2012. (To know more about oil and gas, read Oil And Gas Industry Primer.)
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Cost Reduction
Pioneer Natural Resources (NYSE:PXD) is active in the development of properties in the Eagle Ford Shale in Texas, and has increased production here to 20,000 barrels of oil equivalent (BOE) in the fourth quarter of 2011.
The company's gross cost to drill and complete an Eagle Ford Shale well is between $7 million and $8 million, and yields a pretax internal rate of return of 70%. Despite this high return, Pioneer Natural is still attempting to cut costs further and is experimenting with a new well design that incorporates sand proppant instead of the more expensive ceramic type used to fracture a well.
Pioneer Natural has used sand proppant on 25 wells in a shallower portion of the Eagle Ford Shale, and said that the wells have not been less productive than those fractured with ceramic proppant. The company estimates that it will save $700,000 per well and plans to use this technique in 50% of its 2012 drilling program.
The company has also vertically integrated its operations to lower costs and owns eight hydraulic fracturing fleets, two coiled tubing units and 15 drilling rigs. The company estimates that its savings through the use of vertical integration is at an annualized rate of $440 million.
Carbo Ceramics (NYSE:CRR) is one of the largest suppliers of ceramic and resin coated sand proppant to the industry. The company sold 387 million pounds of proppant in the fourth quarter of 2011.
Comstock Resources (NYSE:CRK) is also working in the Eagle Ford Shale and expects to use pad drilling here when it starts full-scale development of this play. The company implemented the same technique in the Haynesville Shale and estimates that it will save between $500,000 and $1 million per well in the Eagle Ford. This will reduce well costs from $8.5 million to as low as $7.5 million.
Comstock also expects to see reduced costs in the Eagle Ford Shale as a result of additional oil services capacity arriving from dry gas basins. The company is looking for savings of 10 to 20% on hydraulic fracturing costs in 2012 as the tight market eases.
Newfield Exploration Company (NYSE:NFX) reported a lower drilling and completion costs in the Eagle Ford Shale than Pioneer Natural or Comstock. The company said that the average cost in the West Asherton area during the fourth quarter of 2011 was $6.6 million. Newfield has drilled 14 wells to date in this area, which is located in Dimmitt County, Texas.
The Bottom Line
Cutting costs is required for energy companies and these efforts continued during the most recent quarter as operators detailed efforts to reduce the cost of drilling and completing wells. The industry may also see lower costs through the easing of tight markets with the addition of extra oil service capacity fleeing dry gas basins. (For additional reading, check out A Guide To Investing In Oil Markets.)
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.
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Cost Reduction
Pioneer Natural Resources (NYSE:PXD) is active in the development of properties in the Eagle Ford Shale in Texas, and has increased production here to 20,000 barrels of oil equivalent (BOE) in the fourth quarter of 2011.
The company's gross cost to drill and complete an Eagle Ford Shale well is between $7 million and $8 million, and yields a pretax internal rate of return of 70%. Despite this high return, Pioneer Natural is still attempting to cut costs further and is experimenting with a new well design that incorporates sand proppant instead of the more expensive ceramic type used to fracture a well.
Pioneer Natural has used sand proppant on 25 wells in a shallower portion of the Eagle Ford Shale, and said that the wells have not been less productive than those fractured with ceramic proppant. The company estimates that it will save $700,000 per well and plans to use this technique in 50% of its 2012 drilling program.
The company has also vertically integrated its operations to lower costs and owns eight hydraulic fracturing fleets, two coiled tubing units and 15 drilling rigs. The company estimates that its savings through the use of vertical integration is at an annualized rate of $440 million.
Comstock Resources (NYSE:CRK) is also working in the Eagle Ford Shale and expects to use pad drilling here when it starts full-scale development of this play. The company implemented the same technique in the Haynesville Shale and estimates that it will save between $500,000 and $1 million per well in the Eagle Ford. This will reduce well costs from $8.5 million to as low as $7.5 million.
Comstock also expects to see reduced costs in the Eagle Ford Shale as a result of additional oil services capacity arriving from dry gas basins. The company is looking for savings of 10 to 20% on hydraulic fracturing costs in 2012 as the tight market eases.
Newfield Exploration Company (NYSE:NFX) reported a lower drilling and completion costs in the Eagle Ford Shale than Pioneer Natural or Comstock. The company said that the average cost in the West Asherton area during the fourth quarter of 2011 was $6.6 million. Newfield has drilled 14 wells to date in this area, which is located in Dimmitt County, Texas.
The Bottom Line
Cutting costs is required for energy companies and these efforts continued during the most recent quarter as operators detailed efforts to reduce the cost of drilling and completing wells. The industry may also see lower costs through the easing of tight markets with the addition of extra oil service capacity fleeing dry gas basins. (For additional reading, check out A Guide To Investing In Oil Markets.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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