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The Companies That Lead The Recovery In The U.S. Oil Patch

Pioneer drilling rig

Following two years of persistently low oil prices which made companies slash investment and costs, the industry is starting to look up to a brighter 2017.

Analysts and experts see the sector – which has responded to the downturn with streamlined operations and increased flexibility – begin delivering better performance this year, with U.S. Independents leading the way to recovery.

Still, while almost everyone expects U.S. shale to be the first to respond to higher oil prices, drillers would be careful not to overspend and raise production so much that it would kill the oil price increase, which OPEC has managed to talk up in the past month or so.

A recent Wood Mackenzie outlook for the global oil and gas sector in 2017 suggests that U.S. Independents would usher in a new investment cycle, encouraged by Trump’s oil and gas development agenda and having three key competitive advantages: “access to capital; cost-advantaged portfolios; and flexibility to scale back spend sharply if prices stay low”.

Should oil prices average above US$50, U.S. Independents may raise their investment by more than 25 percent, WoodMac said, adding that the majors would still see their combined investment drop, by some 8 percent.

U.S. Independents are now more flexible in responding to the oil price movements, an expert said. Related: Offshore Vessels Provider Sees ‘Clear Signs’ Of Improving Market

“They are more nimble,” comments Rex Preston Stoner, an oil & gas consultant with HUB International’s Tulsa, Oklahoma-based Energy & Marine practice.

“The majors are certainly active, for example, in Texas and Oklahoma,” Stoner - citing Chevron’s recent decision to increase spending in the lucrative Permian basin in West Texas - adds “But, in general, the majors are scaling back overall major upstream investment whereas the Independents are aggressively targeting specific oil and gas plays – county by county and acre by acre – in the region.”

Stoner names specific Independents – ranging in size from the large Oklahoma City-based independent producer Continental Resources to small independents such as Tulsa-based Citizen Energy – as examples of what is seen as an “entrepreneurial spirit” in this sector.

Citing history, Stoner adds:

“We have over a century of experience in developing these natural resources, particularly in Texas and Oklahoma, and the Independents are cannily employing the abundance of talent and infrastructure already in place. For 2017, I expect we’ll see continued but measured growth by the area’s independent producers who, while still hurting from the 2014-15 commodity slump, have the agility to quickly respond to movements in the global oil and gas market.”

Signs that drilling activity and business sentiment in Texas and Oklahoma are improving started to show more clearly in the fourth quarter of 2016, and industry bodies welcomed OPEC’s decision to reduce supply.

Oklahoma Independent Petroleum Association (OIPA) said in a statement that OPEC’s production cut was “good news” for the state.

“Independent oil and natural gas production in Oklahoma accounts for one out of every six jobs, half of the state’s non-farm earnings and approximately 25 percent of all taxes paid in the state, and improved oil and natural gas prices resulting from OPEC’s production cut will be felt throughout the Oklahoma economy,” OIPA President Mike Terry noted.

The Oklahoma Energy Index, a measure of oil and natural gas industry activity, rose by 2 percent in October from September, expanding for the third consecutive month, OIPA said.

Also in Oklahoma, for a second month in a row, tax collections from oil and natural gas production in November 2016 exceeded collections from the same month the previous year, State Treasurer Ken Miller said.

“Prior to October, gross production tax collections had been lower than the prior year each month since December 2014,” Miller added. Related: Will Trump Privatize The TVA For $20 Billion?

In Texas, the Dallas Fed Energy Survey showed that business activity continued to increase in the fourth quarter, according to 67 E&P firms and 80 oilfield services companies polled. Employment and production rose quarter-on-quarter in the fourth quarter for the first time in 2016, the survey showed. Oil and gas output stopped its downward trend in the fourth quarter, after having fallen in the previous quarters of 2016.

In its latest Drilling Productivity Report, the U.S. Energy Information Administration (EIA) expects the seven most prolific U.S. shale areas to increase their total oil production in January 2017 by 2,000 bpd from December 2016, with the Permian offsetting declines in the Bakken, the Eagle Ford, and Utica.

With outlook and sentiment improved, U.S. drillers would be wise to pick cost-efficient strategies, not flooding the market with oil, thus killing off the OPEC-induced price rise. And of course, U.S. shale would keep an eye on the cartel and the non-cartel producers that had joined the cuts to see if they can make good on their promises this time around.

By Tsvetana Paraskova for Oilprice.com

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