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Oil Price Improvement Has Hess Thinking More Rigs For Bakken

Management for Hess Corp. on Wednesday hinted that the company could be adding rigs in the Bakken Shale next year based on lower drilling and completion costs and recent improvements in oil prices.

The New York-based exploration and production (E&P) company, one of the biggest players in the Bakken, said it would formally announce its 2017 capital program early next year. But during a 3Q2016 conference call with analysts, CEO John Hess offered clues as to the operator’s plans for the play, expressing more confidence in prices increasing than he had during a second quarter conference call in July (see Shale Daily, July 28).

“It’s going to be a function of financial returns,” he said. “We said that until oil prices approached $60/bbl it didn’t make sense to accelerate volume for its own sake, but we see with the current improvement in oil prices for next year that we’re now making plans to increase the rig count some, the exact definition of that we’ll give guidance for as we finalize our plans at the end of the year.

“But the core of the core that we have, with lower drilling and completion costs, offers us returns that are competitive with the Permian [Basin] and the Eagle Ford [Shale]. So as oil prices have improved, we think it’s going to make sense to really take a hard look at increasing our rig count for next year.”

Total production from the Bakken during the quarter averaged 107,000 boe/d, down from 113,000 boe/d in 3Q2015, attributed to a reduced drilling program in the play. Hess operated on average three rigs during the third quarter, bringing 22 gross operated wells into production. Drilling and completion costs in the play averaged $4.7 million/well, an 11% decrease from 3Q2015. Management said these savings came as standard well completions were increased from a 35-stage to a 50-stage design.

When asked for more details on the E&P’s current breakevens in the Bakken, COO Gregory Hill said, “If you look at the well inventory that we have in the Bakken that generates a 15% after-tax or higher return at $50/bbl, that is now over 900 wells, and to put that in context that’s increased by some 40% for that same $50/bbl number from last year. So...well costs have come down, and our IP [initial production] rates have gone up as a result of going to higher stage counts. We’re sitting on a very high quality inventory of wells.”

Management also touted the potential returns of the company’s interest in a hydrocarbon discovery in the offshore Guyana, with recent results from the non-operated Liza-3 appraisal well reaffirming estimated recoverable resources on the high end of the 800 million to 1.4 billion boe guidance it previously provided.

Between the long-term potential in Guyana and short-term returns in the Bakken, Hess suggested the company probably won’t be looking to join its peers in the Permian land grab that has been underway in the U.S. onshore.

“I think the way we look at it is, obviously we’re always looking to optimize the value of our portfolio in the normal course of our business,” Hess said. “However, with the robust portfolio of captured growth opportunities that we have, balanced between, I’d say the shorter cycle Bakken, which is low-risk and high return, with returns competitive with the Permian...as well as the longer cycle Guyana that we think will have world-class financial returns as well, acquisitions are low on our priority list.”

Gulf of Mexico production totaled 61,000 boe/d for the quarter, down from 83,000 boe/d in the year-ago period. The decrease was attributed to unplanned downtime related to two subsurface valve failures in two of its offshore fields, and to natural field declines.

Reflecting its efforts to cut costs and protect the balance sheet, capital and exploratory expenditures for the third quarter totaled $435 million, down from $849 million in the year-ago quarter. Spending in the U.S. onshore totaled $130 million, nearly all in the Bakken where it spent $126 million, versus $365 million ($295 million in the Bakken) in 3Q2015. Spending in the U.S. offshore remained relatively flat at $191 million, down slightly from $199 million a year ago.

Production for 3Q2016 averaged 314,000 boe/d versus 380,000 boe/d in the year-ago quarter. Total U.S. production averaged 122,000 b/d of crude, 44,000 b/d of natural gas liquids (NGL) and 270 MMcf/d of natural gas, compared with year-ago output of 152,000 b/d oil, 39,000 b/d of NGLs and 283 MMcf/d of gas. Bakken production averaged 67,000 b/d for crude, 29,000 b/d for NGLs and 66 MMcf/d for gas, compared with year-ago totals of 82,000 b/d, 20,000 b/d liquids and 65 MMcf/d.

Including the effects of hedging, realized prices for U.S. volumes for the quarter averaged $39.33/bbl for crude, $9/bbl for NGLs and $1.67/Mcf for gas, compared with year-ago realized prices of $41.33/bbl, $6.69/bbl for liquids and $1.92/Mcf

For the quarter, Hess posted a net loss of $339 million (minus $1.12/share), compared with a net loss of $279 million (minus 98 cents) in the year-ago quarter. The E&P reported $3.529 billion in cash at the end of the quarter and total debt of $6.654 billion not counting its Bakken midstream segment.

Hess reported net income of $13 million for the quarter from the Bakken midstream segment, down from $16 million in the year-ago period, with the decrease attributed to lower throughput.

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