Hess Corp. is the latest Bakken operator to announce cutbacks in 2015 capital expenditures, capex, amid a weak global crude oil market. The international exploration and production company - the Bakken’s third largest oil producer - announced Jan. 26 an overall capital and exploratory budget for 2015 of $4.7 billion, 16 percent less than the corporation’s 2014 actual spend of $5.6 billion.
While Hess Corp.’s overall fourth quarter production of 362,000 barrels of oil equivalent per day was a 14 percent increase over third quarter output, lower commodity selling prices cut the corporation’s adjusted net income down by more than $300 million and the corporation posted a net loss of $8 million for the quarter. The corporation also reported an average worldwide crude oil selling price, which includes hedging effects, of $74.97 per barrel in the fourth quarter, down 24 percent from the $98.27 average in the third quarter. Excluding hedging pulls the fourth quarter average price down to $67.68.
Despite the fourth quarter loss, 2014 was an overall good year for Hess Corp., but Chief Executive Officer John Hess said the corporation is intent on reducing spending and remaining flexible going into 2015 with the uncertainty in the global oil market. “We are taking prudent steps in 2015 to reduce our spending and maintain our financial flexibility,” Hess said in a Jan. 28 press release. “Given our strong balance sheet and resilient portfolio, we are confident in our ability to manage the current pricing environment and remain very optimistic about the company’s long term growth potential.”
While Hess won’t speculate on where crude oil prices might go in the short-term and beyond, in the current market environment he does see companies scaling back worldwide, which he said will result in a continued decrease in production growth well into 2016. “The near-term impact is that many companies, including ours, are announcing significant reductions to their global investment programs, which will begin to decrease unconventional and conventional production growth in the latter-half of 2015 and even more so in 2016,” Hess said in a Jan. 28 conference call with industry analysts.
And like other Bakken operators, Hess Corp. is also concerned about high service costs in the midst of the weak oil market, and Chief Operating Officer Greg Hill said the corporation is working with its service providers on cost reductions, although he would not venture to guess how much the corporation’s service costs might go down or when.
“As far as service costs, we’re starting to see some response and we’re in very active discussions with all of our suppliers,” Hill said in the Jan. 28 conference call. “So it’s premature to speculate on where those are going to go, but they’re going to go down, but I can’t tell you how much or how fast … at this point and time.”
In the Bakken
Of Hess Corp.’s $4.7 billion 2015 capex, nearly half - $2.1 billion or 45 percent - is earmarked for the corporation’s unconventional resources with most of that - some $1.8 billion or 38 percent of the total 2015 budget - going to the Bakken. However, that Bakken capex is an 18 percent reduction from the 2014 Bakken capex of $2.2 billion.
In 2014, the corporation brought a total of 238 new operated wells on production in the Bakken, and net Bakken production averaged 83,000 boepd over the year, a 24 percent increase over 2013 and well within the corporation’s 2014 guidance of 80,000 to 90,000 boepd. And in the fourth quarter, Hess Corp.’s Bakken production broke the 100,000 boepd threshold, making it the third Bakken operator along with Whiting Petroleum and Continental Resources to reach that milestone. For the fourth quarter, the corporation’s Bakken production averaged 102,000 boepd, up 19 percent over the third quarter and up 50 percent over fourth quarter 2013 output.
Hill said given the current price environment, it makes sense to defer some drilling until prices rebound, and the corporation is planning to cut its Williston Basin rig count to 14 in the first quarter and further to eight in the second quarter for an average of 9.5 rigs for the full-year 2015. That compares to a 17-rig average in 2014.
However, with increased drilling efficiencies, Hill said Hess Corp. plans to drill approximately 20 percent more wells per rig in 2015. “So that’s 18-plus wells per rig in 2015 versus 15 per rig in 2014,” Hill said. The corporation is planning to drill and complete approximately 180 wells in 2015 and bring a total of approximately 210 new wells online.
In 2014, the corporation’s 30-day initial production rates for its Bakken-system wells averaged between 800 and 950 boepd, a range Hill said is well above the industry average.
On spacing, Hill said the corporation has now moved to 13 wells per drill spacing unit as its standard basis for Bakken development. However, he said Hess Corp. currently has two 17-well pilots being tested, which “are performing in line with expectations.” He said there are plans to add three more of those pilots in 2015.
Hess Corp. continued to reduce well costs with a fourth quarter drilling and completion average of $7.1 million per well, down from $7.6 million in the fourth quarter 2013. “We expect to further reduce costs through ongoing efficiencies and by proactively addressing our cost structure in collaboration with our suppliers,” Hill said.
The corporation expects its Bakken production to average between 95,000 and 105,000 boepd over the full year, compared to an average of 83,000 boepd in 2014. “Looking further ahead, the quality of our acreage and our well inventory on a 13-well per DSU development plan continues to support our longer-term net production target of 175,000 boepd for the Bakken,” Hill said. “However, the timing of when this can be reached will be a function of oil price.”
