Observers need look no further than ExxonMobil Corp.’s buyout of shale king XTO Energy Corp. in late 2009 to acknowledge that the integrated U.S. producers aren’t ceding North America’s unconventional oil and gas reservoirs to the independents.
Three of the biggest global operators on Wednesday provided more evidence of that, as ConocoPhillips, Hess Corp. and Occidental Petroleum Corp. all announced that they will pour more money into unconventional reservoirs this year.
ConocoPhillips, the third-largest U.S. producer by market value after No. 1 ExxonMobil (reporting Monday) and Chevron Corp. (reporting Friday), has a huge North American portfolio with holdings in conventional and unconventional basins across the United States and Canada.
What interested the company last year, however, and what is piquing its interest this year, are the liquids-rich Eagle Ford, Barnett and Bakken shales, CFO Jeff Sheets said during a conference call with financial analysts. But it’s not going after gas.
The producer, said Sheets, in 2010 continued to appraise its exploration programs in North America, and continued, like many of its peers, in “reducing our exposure to natural gas in Canada and the Lower 48.” ConocoPhillips’ view “is that North American natural gas prices will be subdued in the near term. We will continue to shift our exposure to liquids plays.”
However, that shift doesn’t necessarily mean it will sell off a lot of assets. In fact, in the Lower 48 the company in late 2010 “expanded its position in several existing plays” adding around 110,000 net acres in shale plays alone, said Sheets. ConocoPhillips added more acreage in the northern part of the Barnett Shale and “elevated activity” in the Eagle Ford and Bakken shales.
The result was a big gain in organic growth through the drillbit. Tuesday the company reported that it added 920 MMBoe of net proved reserves in 2010, with an organic reserve replacement ratio of 139% (see Daily GPI, Jan. 26). Around 65% of the drillbit additions came from North America, the CFO explained.
The gains came about because of the company’s “focus on liquids-rich shale plays,” said Sheets. “In the Eagle Ford we are running 12 rigs now, and we’ll be up to 13” soon. Two-thirds of the production in the Eagle Ford is oily, and one-third of output is gas, he said.
“Look for us to drill 140-150 wells this year. In the Bakken we plan to drill 50-60 wells on things we operate, and our partners will drill another 50 wells in which we have an interest. In the Barnett, on what we operate we plan to drill 30-40 wells, and our partners, in things they operate, plan 20-30 wells.”
The CFO also hinted at coming attractions. The additional acreage added late last year was in “new, emerging North American shale plays,” but he declined to offer details, explaining they will be issued at the company’s scheduled analyst meeting in March.
“We plan a pretty aggressive program for liquids-rich shale plays in the Lower 48,” Sheets said. “We will be putting a lot into appraisal as well this year…In our exploration efforts we plan to delineate the shale plays we have and extend what is working. We also will have some pilots in emerging shale plays, and we’ll have more to talk about as the year progresses…We’re always trying to build our portfolio…”
Hess Corp., which has been grabbing some big stakes in the Williston Basin, also has no plans to slow its Lower 48 development. By the end of 2011, Bakken Shale output should double, said Greg Hill, president of worldwide E&P. He spoke with financial analysts in a separate conference call Wednesday.
Earlier this month the New York City-based explorer, now the second biggest producer in the Bakken play in North Dakota, said it planned to spend more than one-third of its 2011 global capital budget on unconventional oil projects (see Daily GPI, Jan. 10).
Hess now has 18 wells in the Dakota play that are producing 15,000 b/d of crude oil, and it wants to drill “a few more wells” there to assess its potential, Hill said. The company exited 2010 at a target rate of 20,000 b/d. To tap into the unconventional reserves the company plans to use a combination of “both single and dual lateral wells to get core acreage held by production and to optimize development of the field.”
Around $3 billion of Hess’ capital budget is earmarked for U.S. operations and most of it — $1.8 billion — will be invested in the Bakken Shale. The spending is to elevate year-end output to around 40,000 b/d, Hill told analysts.
Los Angeles-based Occidental (Oxy), the fourth largest U.S. producer by market value also is expanding into more shale development in North Dakota, South Texas and its home state — and gas production will be a big part of it — Chairman Ray R. Irani told analysts in a conference call. The company plans to boost capital spending this year to $6.1 billion from $3.9 billion in 2010.
“We have made acquisitions in new producing areas for Oxy — North Dakota and South Texas — which we believe have solid potential for growth,” he said. “We expect the combination of these transactions to immediately improve our earnings, ROCE [return on capital employed] and free cash flow.”
In December the producer agreed to pay around $3.2 billion total in two transactions for acreage in the Eagle Ford and Bakken shales (see Daily GPI, Dec. 13, 2010). The North Dakota acquisition already has closed; the South Texas purchase is set to be completed by the end of March.
“We expect to grow our production in the Williston Basin from these properties to about 30,000 boe/d over the next five years,” said Irani. The South Texas acquisition “gives us properties which have over 320 Bcfe in proven developed reserves and are liquid-rich with a solid inventory of drilling opportunities.”
The additional U.S. properties “immediately yield reasonable earnings and produce good free cash flow — even at current gas prices,” he noted. “As gas prices improve in the future and we optimize overall area opportunities, these properties will fit well with our overall presence, performance and continued growth in the U.S.”
Occidental also plans to spend around $1.22 billion to fund some shale drilling in California, including 107 wells and 28 exploratory wells, said Occidental COO Steve Chazen. He will take over when Irani retires in May.
Earnings-wise, ConocoPhillips reported profits of $2.04 billion ($1.39/share) in 4Q2010, versus $1.29 billion (86 cents) in 4Q2009. Excluding gains on asset sales, write-downs and other items, per-share earnings rose to $1.32 from $1.20. Quarterly revenue jumped 22% y/y to $53.2 billion.
Because of one-time impairments related to dry hole costs offshore Brazil, quarterly net profits for Hess fell 84% from a year earlier to $58 million (18 cents/share) from $358 million ($1.10). E&P earnings were $420 million in 4Q2010, versus $494 million in 4Q2009.
Occidental earned $1.2 billion ($1.49/share) net in the final three months of 2010, up from $938 million ($1.15) in the year-ago period.
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