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Producers Delaying Well Completions, Buying More Acreage on Low Oil Prices

The backlog of uncompleted wells will grow in the Eagle Ford and Bakken shales, but so too could the new acreage plays and/or small-scale merger/acquisition activity, according to strategies outlined Thursday by CEOs at EOG Resources and Marathon Oil Corp.

In the process, exploration and production (E&P) activity at Marathon will take a back seat for some time, according to CEO Lee Tillman, answering questions during an earnings conference call. He drew short of saying the pullback in capital for exploration was a "permanent strategy," but Tillman did say it's the reality now and for the foreseeable future. Tillman said historically, the company had not done as well as he would have liked in the E&P business.

"Exploration remains attractive to us for obvious reasons because of the strong multiples it can generate," Tillman said. "To be very frank, we are not satisfied with our historic performance in exploration, and while we are searching for an enhanced approach to drive improvements, we are reducing our spending there materially."

He said much of the reduction was implemented before the oil price crash, and it was largely driven by "scheduling and commitments we had in the 2015 time period. In the end, exploration must compete for capital allocation with every other aspect of our business, so this year the spending will be materially reduced, and as we look forward, opportunities in exploration will have to go head-to-head with the other investment opportunities we have in our portfolio."

EOG CEO Bill Thomas talked about a strategy for key acreage acquisition and perhaps some strategic company buys under the right circumstances in the low-oil price environment, which he thinks will begin ramping up in the last quarter this year.

"The thing we let guide our potential purchases is our exploration expertise and our understanding of the rocks, so we are really always focused on that type of opportunity that has real sweet spot acreage in our existing core areas [Bakken, Eagle Ford and Permian] or emerging plays," Thomas said.

EOG is deferring its completions this year, which will bring a net total of uncompleted wells to 285 at the end of 2015, compared to the 200 uncompleted wells at the start of this year. There will be 550 new wells drilled, and 465 of those completed, so the net of that total and the 200 from the start leaves 285 uncompleted wells at year-end, according to Gary Thomas, EOG COO.

There is up to $700 million of completion costs involved in the 285 uncompleted wells, the COO said.

In response to an analyst's question about the future oil price needed to have EOG ramp up its completion program, Thomas said that a $10/bbl increase in oil prices would make "a significant difference. Our rate-of-return focus and our capital-return focus are what is driving the completion deferral." He said there are two parts to the deferral.

"If oil prices improve and they look like the forward curve in the $60/bbl range, we would begin completing many of the [200-well backlog] starting in the third quarter. That would reflect additional growth in the fourth quarter, heading into 2016. We want to head into 2016 on an uptick So we think our curve in 2015 will be 'U-shaped.’ It will have the lowest production in the second and third quarters and then ramp up in the fourth."

Marathon executives said they intend to continue indefinitely a completions optimization program. "We're always going to look for the best well productivity at the lowest price possible, particularly as we look at the Bakken and Oklahoma where we have lower activity [relative to the Eagle Ford] for the year," Tillman said.

Tillman said the low-price environment is a "great opportunity" to improve well productivity and spacing so when prices do turn upward he thinks Marathon will be "very well positioned to grow on a full-field scale quickly and at the highest value for the company."

"In the future, this optimization is just going to be a natural cycle of our business."

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