Hess Corp. executives see the Bakken Shale continuing to drive significant cash flow for almost another decade, despite a moratorium on federal oil and natural gas leasing by the Biden administration.
CEO John Hess told investors on Wednesday only 2% of the company’s Bakken acreage is on federal lands. The exploration and production (E&P) company is set to double the number of rigs operating in the North Dakota play to two by the end of March and ultimately would “like to get the rig count to four,” he said on the fourth quarter 2020 earnings call.
“By getting the rig count to four, we not only generate a significant amount of cash flow, but will also be able to hold production in the Bakken broadly flat at around 200,000 boe/d for almost 10 years,” the CEO said.
The company chief said there are 1,800 well locations left in the Bakken that, at current prices, generate “very high returns.” The E&P plans to bring 45 wells online in North Dakota this year at an internal rate of return of 95%. This program, he said, is “similar to last year” in that the initial production (IP) of wells for 180 days is expected to be the same — “120,000 bbl of oil…very good wells.” The E&P has another 50 wells that “are in those very high returns” that it wants to develop.
The role of the Bakken in the portfolio is to be a cash generator, according to the CEO, so the rate at which Hess invests in the play “will be a function of corporate cash flow needs. But you can see the pent-up potential in the Bakken is very large, with some very good return opportunity.”
For 2021, the focus is to further reduce natural gas flaring in the region. Although already well below the 9% threshold required by North Dakota, the plan is to increase gathering to reduce flaring even further. Adding infrastructure is being considered with Hess Midstream LP, according to Chief Operating Officer Greg Hill.
On the oil side, the company is expected to continue lowering the number of wells it brings online in the Bakken. Twenty-two wells came online in 3Q2020, with 12 in the final three months of the year. Plans are to bring only four wells online by the end of March.
“Naturally, you’re going to get some oil decline associated with that,” Hill said. “However, once that second rig kicks in, which you really see the effects of in the second half of the year, that’s when oil will begin to stabilize and be flat from then on,” at around 175,000 b/d for “a number of years.”
Fourth quarter production in the Bakken averaged 189,000 boe/d net, an increase of about 9% above the year-ago quarter and above guidance of 180,000-185,000 net boe/d. For the full-year 2020, Bakken production averaged 193,000 boe/d, up around 27% compared with 2019 and original full-year guidance of 180,000 boe/d.
This increase occurred despite lowering the rig count in the Bakken to only one in May, down from six, according to Hill. The drilling and completion (D&C) cost per well averaged $6.2 million in 2020, which was $600,000 or 9% lower than 2019. In 2021, D&C costs are expected to average below $6 million per well.
Meanwhile, Hess in December agreed to sell two cargoes that were stored on very large crude carriers (VLCC) earlier last year. The producer chartered the VLCCs to transport and store a total of 6.3 million bbl of Bakken crude in 2Q2020 and 3Q2020 for sale in Asian markets. The first VLCC cargo of 2.1 million bbl was sold in September.
In the deepwater Gulf of Mexico (GOM), net production averaged 32,000 boe/d in 4Q2020 and 56,000 boe/d for the year. No new wells are planned in the GOM for now, with net production set to average about 45,000 boe/d in 2021.
Despite the lack of activity in the GOM, the deepwater remains a “very important cash engine…as well as a platform for future growth,” Hill said.
Addressing President Biden’s pause on federal oil and gas leasing announced Wednesday, the CEO said the administration has to be not only “climate literate, but energy literate.” The administration has to realize that oil and gas are “a strategic engine for the U.S. economy, especially at a time that we’re trying to recover the economy from Covid.”
Power costs in the United States, “in large part because of shale gas, are half what they are in Europe,” he said. In terms of national security, “we’re energy independent in large part because of shale oil and shale gas. It’s just a question of finding the balance here.
“Hopefully, as the administration moves forward, they will extend a hand as well. We need to find common ground to make sure we do everything we can to address climate change, but also that oil and gas play a key role in the economy’s recovery.”
Hess has purchased West Texas Intermediate crude put options with an average monthly floor price of $45/bbl for 100,000 b/d, and Brent put options with an average monthly floor price of $50/bbl for 20,000 b/d.
Oil and gas proved reserves at the end of 2020 were 1.170 billion boe, compared with 1.197 billion boe on Dec. 31, 2019. Capital and exploratory expenditures in 2021 are projected to be $1.9 billion, up from $1.8 billion in 2020. The bulk of capital is to be spent in the Bakken and offshore Guyana.
Hess reported a net loss of $97 million (minus 32 cents/share) in the fourth quarter, compared with a net loss of $222 million (minus 73 cents) in 4Q2019. For 2020, the company reported a $3.093 billion loss (minus $10.15/share), compared with a net loss of $408 million (minus $1.37) in 2019.
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