US Shale Winners And Losers – Part Two

In going over the 3rd quarter reports from the US E+P's, the report from Continental Resources (CLR) was the most interesting to me. Harold Hamm, CEO of Continental, was virtually alone in cutting 2015 capex and production guidance, a move obviously designed to help weather what I'm calling an $80-oil winter of sustained low oil prices. In contrast, virtually every other CEO has "whistled through the graveyard" in refusing to adjust spend and production targets as part of their 3rd quarter conference calls. Considering that Continental is by far the best positioned Bakken E+P and Harold Hamm perhaps the smartest oilman ever, I tend to think his lone honest assessment to be far more on target than everyone else.

We are going to see some major production and spend declines caused by $80 oil, and they will be financially forced upon some players who don't have the resilience of a Continental Resources.

Let's look at some of the possible problem players in the Bakken to continue on with our series on shale production winners and losers.

In part one, we isolated some of the attributes of producers likely to show strain from sustained low oil: rickety balance sheets, high yield debt, holdings outside the core of the Nesson Anticline and behind the curve technology and efficiencies being a few. With this in mind, a couple of companies working in the Williston Basin appear in likely trouble over the next six months. Again, my thanks to Michael Filloon of Shaletrader.com for his excellent research help in isolating these likely 'weakies':

Emerald Oil (EOX): Higher well completion costs and tough debt position. Their upper three forks acreage just won't produce fast enough to deliver a reasonable payback period in an $80 oil environment.

American Eagle (AMZG): Northern acreage is a slow producer and can sustain only 4 wells per sector.

Magnum Hunter (MHR): Acreage is similar to AMZG's and continually looking to shore up the balance sheet. Their survival is dependent on their Utica natural gas play and they could make it, but not without jettisoning their Bakken holdings.

Northern Oil and Gas (NOG): Biggest problem is of course that they are not owners of much of their acreage. This non-operative position puts them at the mercy of other operators and their scheduling, sure to decline with a low oil price. Plus, looking at their acreage you'd need much higher oil to deliver reasonable payback. 6 months of prices here will hurt a lot.

Triangle Petroleum (TPLM): New acquisitions in the North couldn't have come at a worse time. They have the advantage of their own completion and midstream assets and decent results, but still will likely need an exploration and production slowdown to weather the storm.

Halcon (HK): Good acreage in the Bakken is overridden by the miserable debt position, a race that Halcon will begin to quickly lose in an $80 oil environment. Floyd has made one too many bad calls with this one (particularly in the Utica) and burdened the company with too much paper. They'll fight to the end, but in a tough spot. Run, Forrest, run.

Oasis (OAS): In no danger of folding, but much of their acreage is outside the 'sweet spot', including some poorly timed new acquisitions. They'll have to hunker down in their solid plots in Mountrail, Williams and Mackenzie counties.

I've outlined these players not to predict any of their demises - all we are seeking to find out is how much production growth is at risk and how soon that production slow down might appear. Even larger producers like Continental will ultimately see production reductions if oil remains this low for longer than a year. At the end of this series, Michael and I will try to assess how much US production is likely to come off line and when - which will really mark the opportunity in the space for the future.

But next in the series we will be attempting to find other stressed producers outside of the Williston basin. In case you needed a teaser, we'll start out in the Mississippi Lime and Tuscaloosa Marine Shale areas.