The Lower 48 oil and natural gas business that BP plc carved out under a separate umbrella took a tumble in the second quarter, with the rig count falling from 13 working during the first three months of the year to only one at the end of June.

The primary production focus of Denver-based BPX Energy is in Texas, where unconventional resources abound in the Permian Basin and Eagle Ford Shale, as well as the Haynesville Shale, which straddles portions of East Texas and North Louisiana.

Because parent BP plc is charting a staggering 40% reduction in production as it transforms from hydrocarbons into an integrated energy company, executives were asked how the U.S. onshore fits in with those intentions. No mention of the U.S. onshore was made during the formal conference call presentation.

CFO Murray Auchincloss tried to assuage concerns. “BPX remains core to the business,” he told analysts during the quarterly conference call. The Lower 48 unit “continues to do really well…The reservoirs are better than we thought; we’re finding more zones than we thought originally.”

More quarterly earnings coverage by NGI may be found here

BP long has been working in North America, and early on became a producing machine both onshore and in the Gulf of Mexico and Alaska. It also has for years been the No. 1 natural gas marketer in North America, according to NGI’s quarterly tally. 

Through the years the North American portfolio has been shuffled and reshuffled. Two years ago BPX became an onshore producing giant, more than doubling oil production to 124,000 b/d-plus with BP’s $10.5 billion purchase of BPH Texas-rich assets. The deal also lifted U.S. natural gas production at that time to 2.175 Bcf/d from 2018’s 1.705 Bcf/d.

Cost synergies that have come from rolling the BHP portfolio into BPX are “above the $352 million target” management had set, Auchincloss noted. 

In addition, declining oilfield costs should give an assist when activity ramps up. 

“When we start drilling again, service rates are going to be an awful lot lower,” he said. “So the investment case remains strong.”
The go-forward plan, however, is to remain flexible. Production declined year/year in BPX’s portfolio to 364,000 boe/d from 499,000 boe/d, and it fell from first quarter output of 449,000 boe/d. Natural gas output slumped from a year ago to 1.376 Bcf/d from 2.2 Bcf/d. Liquids production was higher at 127,000 b/d from 116,000 b/d.

BPX at the end of June had total net proved reserves estimated at 1.016 billion boe, down from year-ago reserves of 1.982 billion boe/d.

The only rig running at the end of June was in the Permian, a drastic decline from the first three months and a year ago. 

During 1Q2020, BPX on average was running 13 rigs, with seven in the Eagle Ford, four in the Permian and two in the Haynesville.There also were on average 13 rigs in operation during 2Q2019, with six in the Eagle Ford, four in the Haynesville and three in the Permian. 

“We have two great gas basins,” the CFO said. Haynesville is a gas-weighted basin, while the Permian has massive associated gas as the No. 1 oil basin.

“We have two great liquids basins,” Auchincloss told analysts, referring to the Permian and Eagle Ford. “Depending on what happens on natural gas price, or depending on what happens on oil prices, we’ll have the ability to modulate investment into that.”

The breakeven for producing BPX assets today is “around $3.00/Mcf Henry Hub, which you can see in the forward markets in December.” For West Texas Intermediate oil, the breakeven is around $35, which puts BPX in the money today. 

The Lower 48 volumes fetched an average realized price in 2Q2020 of $9.20/boe, versus year-ago realizations of $17.24. Gas prices averaged 96 cents/Mcf from $1.79. Liquids prices fell to an average $15.92/bbl from $38.89.

The Lower 48 is “cash flow breakeven with about $1 billion of capital expenditures going in,” Auchincloss said. “If prices pick up and we get activity going back in there, we should start to see growth in cash flow over time” with “strong returns potential.” 

The quality of the reservoir “still matters.”