Lower commodity prices and high operating expenses are causing Marathon Oil Corp. to shed drilling rigs in several of its key U.S. shale plays, including the Bakken.
“This lower price environment, coupled with costs that have not declined at a comparable rate, dictate a more disciplined level of domestic spending and activity,” Clarence P. Cazalot, Marathon’s chief executive officer, said Aug. 1 during the company’s 2012 second-quarter earnings call.
For the remainder of 2012 and perhaps into 2013, he said, Marathon’s rig count is being reduced from eight to five in North Dakota’s Bakken and from six to two in Oklahoma’s Anadarko Woodford.
“We believe we can maintain flat production in both of these areas through 2013 at these rig levels,” Cazalot said. “But obviously, we retain the flexibility to ramp back up, if prices and/or costs improve.”
208 Bakken rigs reportedThe total rig count in North Dakota’s Bakken averaged 209 in April, 211 in May and 213 in June, then dropped to 208 in mid-July, according to the last official rig tally reported by the state Department of Mineral Resources, coming less than two weeks before Marathon’s announcement.
Marathon also has shelved plans to increase the number of rigs operating in the Texas Eagle Ford from 18 to 20, saying that because of reduced drilling times and other efficiencies, the company is now in a position to drill and complete “our target number of wells with 18 rigs.”
Moreover, the company for now has suspended drilling in the Niobrara, another liquids shale play, located in the DJ basin of southeast Wyoming and northern Colorado.
“We’re being able to release the rigs on the basis of contracts expiring. And so as economics shift in the basins, we would expect our overall pricing power on drilling rigs to be able to lead us to attractive contract rates,” said Lance Robertson, Marathon’s regional vice president for South Texas.
Fewer rigs won’t hurtCazalot told analysts that fewer rigs in the United States would not hurt the company’s overall projected 5 percent production growth rate in 2012 versus 2011. Marathon still is looking at 6-8 percent growth for 2013.
“We are focused on maintaining our growth while living within our cash flows,” he said, noting that Marathon’s asset divestiture program also is on track to meet or exceed its $1.5-to-$3 billion target by the end of 2013.
Marathon’s adjusted net income fell to $416 million in the 2012 second quarter from $478 million in the first quarter. Worldwide production available for sale slipped to 363,000 barrels of oil equivalent per day from 371,000 boepd, due primarily to planned turnarounds in Norway, Equatorial Guinea and the Gulf of Mexico.
Marathon does not include Libya in its forecast because of uncertainty around sustained production levels.
$70 million in U.S. incomeIn the United States, income was $70 million for the second quarter of 2012, compared to $109 million in the first quarter. The decrease was attributed primarily to lower price realizations and higher exploration expenses.
“The positive financial impact of our solid operational performance was more than offset by lower commodity prices compared to the first quarter,” Cazalot said, noting that both domestic liquid hydrocarbon and natural gas price realizations were lower in the second quarter.
However, compared to last year’s second quarter, Marathon’s total production was up 6 percent, driven by growth in the company’s key resource plays. And production from these plays also partially offset the declines from other areas in this year’s second quarter, with a collective 20 percent increase, the company reported. Individually, Eagle Ford output rocketed 50 percent to 21,000 boepd from the first quarter, while Anadarko Woodford production jumped 24 percent to 26,500 boepd. Bakken production increased by a more modest 4.7 percent to 26,700 boepd versus the first quarter.
Onshore production up 7%Overall, Lower 48 onshore production increased nearly 7 percent from the first to second quarter.
In the Bakken, Marathon drilled 26 gross wells during the second quarter and brought 24 wells to sales. The company said it continued to achieve strong results from the Myrmidon area with average 24-hour initial production, IP, rates in excess of 2,000 boepd. Marathon’s Bakken production is 90 percent crude oil and 5 percent natural gas liquids.
Marathon said it was on track to deliver greater than 150 percent reserve replacement in 2012, excluding acquisitions and divestitures.
Total exploration expenses were $173 million for the second quarter of 2012, compared to $142 million in the previous quarter. Second quarter 2012 exploration expenses included dry well costs and unproven property impairment associated with the Kilchurn prospect in the Gulf of Mexico.
Marathon estimates 2012 worldwide third-quarter production available for sale will be between 365,000 and 380,000 boepd, again excluding Libya. The higher volumes anticipated for the third quarter, compared to the second quarter, reflect continued growth in the U.S. resource plays and include two months’ production contribution from the $750 million Paloma Partners II LLC acquisition.
Deal boosts Eagle Ford productionThe Paloma deal increases Marathon’s acreage in the core of the Eagle Ford play by 17,131 net acres. The transaction includes 17 gross operated and nine gross non-operated wells that produced an average of about 8,600 net boepd for the month of July, of which 70 percent was liquids.
“A real success story is being seen in the Eagle Ford,” Cazalot said.
He said 61 wells were drilled in the Eagle Ford while 50 wells were brought to sales during the second quarter. At the end of July, 20 operated wells were awaiting completion. The company continues to expect production to average 30,000 net boepd for the full year, excluding Paloma production.
To complement drilling and completion activity in the Eagle Ford, Cazalot said, Marathon continues to build infrastructure to support production growth across the operating area. About 210 miles of gathering lines were installed in the first half of 2012, while four new central gathering and treating facilities were commissioned, with five additional facilities under construction.
Guidance for full-year production available for sale worldwide has been narrowed to between 365,000 and 380,000 boepd, reflecting the strong 2012 first half performance, Marathon said. This guidance includes the production impacts of the Paloma acquisition and the anticipated $375 million sale of the company’s Alaska assets.
In the United States, excluding its Paloma transaction, Marathon said it expects to reach between 120,000 and 130,000 boepd in the fourth quarter 2012, a 60-to 70 percent increase since the third quarter of 2011.