Hess Corp. is again trimming its 2015 capital and exploration budget as it continues to benefit from cost efficiencies while maintaining production, and the corporation’s spending strategy is to focus investments in its existing and high return assets, including what it calls its “core of the core” position in the Bakken.
The corporation reported first quarter production averaged 361,000 barrels of oil equivalent per day. While that production was essentially flat with fourth quarter 2014 output of 362,000 boepd, it was up 14 percent over third quarter 2014 output of 318,000 boepd and up 10 percent over 2014 average output of 329,000 boepd.
But strong first quarter production was not enough to offset lower commodity prices and higher depreciation, depletion and amortization which resulted in an adjusted net loss of $279 million for the quarter. “While low prices significantly impacted our first quarter financial results, we delivered strong operating performance and production growth,” Chief Executive Officer John Hess told industry analysts in a first quarter results conference call on April 29.
Going forward, the corporation is looking at more than just strong operating performance. While 2015 guidance anticipates production between 350,000 and 360,000 boepd, Hess Corp. is also trimming its 2015 capital and exploratory budget by another $300 million, bringing that capex down to $4.4 billion, 21 percent less than its total 2014 spend.
However, that $300 million budget cut is only part of the savings the corporation is anticipating. “In early February, we met with approximately 100 of our top service providers and suppliers to seek meaningful and sustainable cost reductions,” Hess told analysts. “To date, we have indentified cost reductions of approximately $550 million with approximately $300 million resulting from a reduction in capital and exploratory expenditures and approximately $250 million from a reduction in cash operating costs.” That $250 million in cost savings, according to Hess, will reduce the corporation’s 2015 cash costs by $2 per barrel.
And $1.7 billion or 39 percent of the $4.4 billion 2015 capex is earmarked for the Bakken, down $100 million from the previous capex which had $1.8 billion going to the Bakken.
In the Bakken
Of the 361,000 boepd production in the first quarter, slightly less than one-third of which ― some 108,000 boepd ― came from the Bakken. Furthermore, the Bakken was the largest crude oil and natural gas liquids producer among the corporation’s plays in the first quarter, accounting for 34 percent of crude production and 54 percent of NGL output. While not the largest natural gas producing asset, the Bakken did account for 10 percent of the corporation’s gas production in the quarter.
Between the first quarters of 2014 and 2015, Hess Corp.’s overall pro forma production grew by 67,000 boepd or 23 percent, an increase driven primarily by the Bakken where production grew by 45,000 boepd over that period.
The 108,000 first quarter Bakken output was a 6 percent increase over the 102,000 boepd output in the fourth quarter. However, that increase came as the number of wells brought on production in the first quarter fell to 70, down 26 from the 96 in the fourth quarter.
Hess Corp. averaged 17 rigs in the Bakken in 2014 and 12 rigs throughout the first quarter, but as of the end of April the rig count stood at eight and the corporation plans to maintain that count through the remainder of 2015. Despite the lower rig count, the corporation plans to drill 178 wells in 2015, complete 214 and bring 213 new wells on production due to increasing drilling efficiencies. In comparison, in 2014 the corporation drilled 261 wells, completed 230 and brought 238 on production.
For the second quarter, the corporation expects net Bakken production to average between 100,000 and 110,000 boepd, and for full-year 2015, net Bakken production is expected to average between 95,000 and 105,000 boepd.
“Because of our ‘core of the core’ position in the Bakken, we retain a substantial drilling inventory where economics remain attractive,” Greg Hill, Hess Corp.’s chief operating officer and president of exploration and production said in the April 29 conference call. “By applying lean manufacturing practices through our operations, we continue to drive down our Bakken drilling and completion costs with the first quarter averaging $6.8 million per well, versus $7.1 million in the fourth quarter and $7.5 million in the year-ago quarter.”
The corporation is looking even further for cost savings. “Going forward, including the effect of further lean efficiency gains and service cost reductions, we are now targeting drilling and completion costs to average between $6 million and $6.5 million per well for full-year 2015,” Hill said. “Our top quartile costs ― in combination with the high productivity of our wells ― allows us to continue to deliver some of the highest return wells in the play.”
In the Bakken, Hess Corp. is also continuing with downspacing testing. Its standard Bakken development has been 13 wells per drill spacing unit, but Hill said the corporation has been pilot testing 17 wells on four DSUs, and the majority of those wells are performing in line with type curves, indicating minimal interference. He said plans are to increase the 17-well pilots from four to nine in 2015.
Ramping down, ramping up
While discussing the prospects of activity ramping back up in the Bakken in the context of sustaining cost savings, Hill said it will take a longer period of time for activity to get back to previous levels than the time it took to slow down. “The ramp up will not be as fast as the ramp down,” he said. “Why? Because there is a significant amount of the workforce that has left the oil and gas industry, and so to restart those rigs and get crews and get all the people you need, that’s going to be a much slower ramp. So I think, as an industry, our ability to ramp up will not be as fast as maybe some people might anticipate.”
But that is only part of the equation; the other part is knowing when to start ramping up activity, and that is something Hess Corp. is going to carefully evaluate. “I think the other thing that we’re thinking about … is we’ll have to see a fairly strong price signal for an extended period of time before we’re just going to ramp activity back up,” Hill said.
