Local drillers see shares tumble as oil price drops

GREELEY — Stocks of companies that operate in Northern Colorado have plummeted with falling oil prices, potentially leading to decreased capital spending next year.

PDC Energy Inc. (Nasdaq: PDCE), which drills oil wells in Weld County, posted among the steepest declines. Company shares sank to a 52-week low of $27.91 in December after reaching a high of $70.44 in June, a 60 percent decline in six months.

Oil prices began falling from around $100 per barrel in July to $67 in December after OPEC said it would not cut production. Energy stocks, meanwhile, have fallen with the decline in oil prices, in some cases losing nearly half their value from highs seen this summer. The downturn in oil prices comes as oil producers plan to announce their capital spending plans for 2015, and some analysts believe those budgets could see cuts.

Moody’s Investor Service issued a report last month cutting estimates for the price of West Texas Intermediate crude for the next two years. Moody’s forecast prices of $75 per barrel in 2015 and $80 per barrel in 2016.

Since June, global oil supplies have increased with higher production in the United States and as Libyan crude supplies have returned online following civil strife in 2011, according to Moody’s. Rising demand next year, however will temper the fall in oil prices.

But, Moody’s cautioned, “several factors could strain oil prices in 2015, including a further decline in China’s growth, a significant lifting of sanctions on Iran that brings a major national supplier to the world market, and a lack of production discipline among OPEC members that rely on high oil prices to finance national budgets.”

Iberia Capital Partners in New Orleans forecasts capital-spending budget cuts and subsequent decreased production by U.S. oil companies as they seek to deal with falling oil prices.

The increase in drilling led to an oversupply of oil that helped dampen oil prices, said Iberia’s David Beard, managing director of Energy Equity Research.

“This year, you saw a pretty big ramp up in drilling,” Beard said. “It was a classic case of increase in supply and the fears of increase in supply coupled with slowing demand outside the U.S.

“Those two combinations, especially with a commodity that’s priced on the margin, drove prices down,” he said.

The analyst firm projects that $70- to $80-per-barrel oil prices will lead to oil production increases of less than 400,000 barrels per day, well below the approximately 1-million-barrel-per-day annual increase that the nation has seen in recent years.

The firm believes capital spending among 33 small- and mid-capitalization oil companies in the United States tracked by Iberia could fall 13 percent to 16 percent, leading to lower production.

Oil companies planned to spend billions of dollars in Northern Colorado this year, and will begin announcing their 2015 capital budgets this month.

PDC Energy, for one, said it would slash its 2015 capital budget to $557 million, a 14 percent decline from the company’s $647 million capital budget for 2014. The company, however, will increase its spending in the Wattenberg field, which includes territory in Weld County, to $516 million for next year, up from $272 million this year. It has decided to idle a drilling rig in Ohio to focus on “highest return projects in the Wattenberg.”

Calgary, Alberta-based Encana, which drills oil and natural-gas wells in the Erie area, is another local producer that will release its capital spending plans this month. The company said earlier this year that it would spend as much as $300 million in Northern Colorado.

Encana (NYSE: ECA) (TSX: ECA) monitors market conditions and plans accordingly, seeking to align its capital spending with dividends and cash flow, company spokesman Doug Hock said.

“I can tell you that even at current oil prices, our (Denver-Julesburg Basin) wells are economic,” he said. “Our current plans are based on economic thresholds that create returns well below the current commodity prices.”

Representatives of Anadarko Petroleum Corp. (NYSE: APC) and Noble Energy Inc. (NYSE: NBL) did not comment on how oil prices might affect their budgets.
Even at $60 per barrel, companies in Northern Colorado have the potential to earn 25 percent rates of return, said Ryan Smith, senior energy analyst for Bentek Energy in Denver.

“A 25 percent return is still decent,” he said. “On average, producers are still generating enough money to continue operations.”

Furthermore, many producers also have set oil price contracts for 2015 at $80 to $90 per barrel to lessen risk of lower oil prices, Smith said. Those hedges account for 40 percent to 50 percent of Northern Colorado companies’ production in some cases.

For 2015, PDC Energy has hedged 80 percent of its crude production at $89 per barrel.

Next year, Bentek still expects record-breaking average daily production of 285,000 barrels in the Denver-Julesburg Basin, a territory that includes Weld County. That’s up from an average of 213,000 barrels per day in 2014. Noble Energy and Anadarko will account for a majority of that growth.

“You really have to see more of a sustained low-price environment at this rate to really slow down activity,” Smith said. “You haven’t seen oil prices crash enough to say these plays are uneconomic.”

Northern Colorado companies that survive lower prices will have a diverse asset portfolio of not just oil but also natural gas and natural-gas liquid production, said Rowena Cipriano-Reyes, a Denver-based partner with PricewaterhouseCoopers LLP’s energy practice. Companies that have higher debt may suffer from banks lowering their borrowing bases.

Companies with a longer history of technology and research and development to lower their drilling costs will perform better, she said.

Weld County, where companies produced 80 percent of Colorado’s record-breaking 64.1 million barrels of oil last year, plans to watch the situation, said county spokeswoman Jennifer Finch.

Property taxes make up the foundation of Weld’s budget. Last year, oil and gas accounted for $3.9 billion, or 55 percent of the $7.1 billion of assessed property value in Weld. That’s up from $3.4 billion in assessed oil and gas property value, or 52 percent of Weld’s $6.5 billion in total assessed property value the year before.

Since the county assesses property values biennially, a downturn that occurs in any year would not be felt through property taxes until two years later.

“The downturn in oil prices, should it remain, would not be felt by Weld County with regard to the county budget for two years,” Finch said, “providing time for us to revise, and if needed cut, the budget to handle the financial loss.”

Steve Lynn can be reached at 970-232-3147, 303-630-1968 or slynn@bizwestmedia.com. Follow him on Twitter at @SteveLynnBW.

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