Low oil prices are generally positive for the U.S. economy. However, they’re literally killing off exploration and production companies one by one.
This past January, E&Ps cut 20,100 jobs. According to job placement firm Challenger, Gray & Christmas, that’s 42% more than all of the jobs cut – industrywide – in 2014.[ad#Google Adsense 336×280-IA]This statistic should give you a sense of what’s going on here.
Former boomtowns are now ghost towns, with unused drill rigs dotting the landscape in many areas.
Last week, another 10 rigs were pulled from production.
There are now just 362 rigs running in the U.S.
That’s a 54% drop from last year’s count.
And it’s a 77% drop from the record 1,609 rigs that were running in October 2014.
The question is… Can ANY E&P company make a profit at today’s crude prices?
Raymond James & Associates recently conducted a study of 18 U.S. plays to determine which – if any – can still make a buck in today’s environment.
It assumed a WTI price of $50 per barrel – admittedly optimistic in the near term. But based on this figure, Raymond James determined that 13 of the 18 plays could produce a before-tax internal rate of return of 15%.
In other words, just the slightest of profits. And taxes should eat up a good chunk of that upside. So we’re essentially looking at a 15% IRR as a breakeven price.
You can check out the performance of individual plays in the chart below.
SCOOP stands for South Central Oklahoma Oil Province. STACK refers to the Sooner Trend of the Anadarko in Canadian and Kingfisher counties.
So, in all, 70% of U.S. shale plays should be able to produce an IRR of 15%… with oil priced at $50 per barrel.
On the international stage, however, the study found that only 10% of plays could achieve similar IRRs with Brent at less than $50 per barrel. (Quick refresher: WTI refers to oil extracted from U.S. wells, while Brent represents oil refined in Europe, Africa and other parts of the world.) Those areas are onshore Russia and select areas in the Persian Gulf.
Regardless, neither Russia nor anyone else would make much money with Brent priced at $50 per barrel. And with both WTI and Brent currently selling below $40 per barrel, the question remains…
Who’s making money now?
The chart above shows only six U.S. shale plays where E&P companies can achieve breakeven operation at today’s prices.
At $35 oil, we’re down to just 25% of these plays being worth the trouble for E&Ps – which explains why most companies are hanging on by their fingernails right now.
With WTI at sub-$40 levels, operators are no longer drilling at a feverish pace in the formerly booming Eagle Ford. However, when prices improve, there are still many years of drilling inventory to work through there.
What Raymond James & Associates’ study shows is that – at today’s prices – the Permian Basin is still the best play out of all the major oil shale areas in the U.S.
It’s the one area where production continues to increase.
The few E&Ps that remain there are still drilling and completing wells. In addition, the Permian has multiple layers, or “landing zones,” which make its wells much more cost-effective.
If you want to take a gamble on E&P companies right now, I’d stick with those focused on the Permian. I recently recommended a company that’s doing just that to my Advanced Energy Strategist subscribers.
Source: Investment U