Another wild day for oil. West Texas Intermediate has swung in a nearly $3 range Thursday. Oil and oil stocks started broadly weaker on EOG's announcement that it will cut 2015 capital expenditures even more than expected (about 40 percent lower than last year) and later on news that U.S. commercial crude inventories rose by 7.7 million barrels to a record 425.6 million, the biggest weekly addition since records began in 1982.
Someone mentioned to me that there were more than a dozen conference calls Thursday in the energy sector, including calls by EOG, Marathon, and Noble Energy.
The themes are similar: holding the line on costs and expenses, leaving the door open to cutting costs further, and, in many cases, expressing the firm belief that oil prices—and production growth—will be rebounding, eventually.
EOG, for example, while dramatically cutting capital expenditures for 2015, also said oil output growth will be resuming by 2016.
EOG has one big advantage: it has a huge presence in shale in the U.S. They can ramp up and down production very quickly.
Shale oil production, the major factor in the collapse of oil prices, is very easy to dial up or down. Starting a well for shale drilling can take just a few weeks and a few million dollars.
That is very different than deepwater drilling in, say, the Gulf of Mexico, where it might take 3 to 5 years of planning and take $100 to $200 million to drill. Just hiring the rig can cost roughly $500,000 a day, independent of all other costs...and that's cheap! Day rig prices used to be $750,000 a day.
Imagine, then, being a company like Marathon Oil, which has significant exposure to deepwater oil drilling all over the world, including the Gulf of Mexico, Libya, and Norway.
This part of the business takes a long time to ramp up, and a long time to ramp down.
That's why Capital One Securities noted that Marathon is still estimating that production growth will INCREASE five to seven percent in 2015 (e-Libya and Norway). It will take months to ramp down production, but by fourth quarter 2015 production should be three to four percent below fourth quarter 2014.
And where are they directing their reduced capital expenditures? Almost all of it—70 percent—is going to the shale drilling sites it controls in the U.S.: Eagle Ford in Texas, the Bakken in North Dakota, and Oklahoma.
Why? Because that's where they can have more control over production levels! Easier to ramp up, easier to ramp down.