US E&Ps Can Turn A Profit On $50 to $60 Oil, Barclays Finds
Sharp declines in development costs and advancements in capital efficiency means exploration and production companies (E&Ps) can turn a solid profit even if oil remains in the $50 to $60 per barrel range, according to Barclays’ analysis of year-end 2016 annual reports.
In fact, Barclays is projecting that within that range, the industry can deliver average recycle ratios (per-barrel profit divided by the cost of discovering and extracting the product) close to 145 percent, grow reserves and production at a consistent 7 percent rate and keep balance sheets in shape.
Last year, drill-bit finding and development costs dropped 30 percent from 2015 and 50 percent from 2015, Barclays said in an April 26 equity research report. Permian and Appalachian players have typically been the top performers.
And, entering 2017, analysts projected that industry optimism would propel capital spending upward for the first time since 2014.
“We observe a strong correlation between capital efficiency, balance sheet adjusted production growth share performance and valuation,” Barclays analysts said.
Looking ahead, Barclays said companies with the potential for greatest improvement in capital efficiency this year compared to their 2014-2016 performance include: CONSOL Energy Inc., Comstock Resources Inc., Devon Energy Corp. and Noble Energy Inc.
“Our group of E&P companies continued to demonstrate remarkable resilience to weak commodity prices during 2016, growing aggregate proved reserves by 3 percent from [year-end 2015] to [year-end 2016] despite an average decline of 11 percent in oil prices and 8 percent in gas prices,” Barclays said.
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