Downturn Winners, Victims Determined by Response to Key Cost Changes

Energy companies will have to make cost base structural changes, but it will bring a recovery price point next year to $70 per barrel, analysts said.

That recovery will depend more on increased demand than new supply, said analysts at A.T. Kearney. And, it’s unlikely to resolve itself until the first half of 2016 because the recovery is driven largely by increased demand and gross domestic product instead of a quick adjustment by existing suppliers.

The report was drafted by Raymundo Sanchez, a partner at Kearney, and Vivek Chidambaram, a principal with the consulting firm.

“The ride is going to be painful, and while consolidation is likely to be a lever for relieving some of this pain, a fundamental structural change in the cost will be a differentiator between the survivors and the victims of this downturn,” they wrote.

Those fundamental changes include addressing capital allocation and planning; use of technology and advanced data analytics; and efficiency at the corporate level.

“The length of the downturn means that the companies hoping to outlast it cannot just paper over their problems with a few non-structural cost controls,” they said in the report.

Still, Kearney expects oil price recovery next year. Other analysts, including Raymond James & Associates in Houston say commodity prices will likely not see growth until 2017.

RayJa noted that U.S. oil production began sliding in May and said Sept. 14 that decrease will continue through the end of the year, bottoming out in February.

And even if the rig count doesn’t rebound until 2017, U.S. production oil will increase, they said.

Put simply, RayJa analysts said that it will be new well production efficiencies from enhanced completion techniques and high-grading lead to initial productivity gains of 24 percent in 2015 and another 15 percent in 2016, and a slower decline rate in shale plays that make a difference.

“With slower decline rates and more efficient wells, the U.S. should be able to post modest oil production gains starting in early 2016 without a massive surge in U.S. drilling activity,” RayJa said.


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