Marathon Oil Dials Back in the Onshore United States
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Marathon Oil (NYSE: MRO) is cutting back on its oil and gas development program in the onshore United States as the company reacts to lower cash flow from falling commodity prices while drilling and completion costs continue to stay at stubbornly high levels.
Eagle Ford Shale
Marathon Oil's largest onshore operation in the United States is in South Texas, where the company is developing the Eagle Ford Shale. The company is operating 20 rigs here and plans to drop two rigs as a result of lower prices for crude oil and natural gas liquids. Marathon Oil still believes that it can still maintain its original development program of 230 to 240 wells as the company has become more efficient in its drilling operations here.
Marathon Oil even announced that it would drill 11 additional Eagle Ford Shale wells on properties recently acquired from Paloma Partners II LLC. The company is buying 17,131 net acres for approximately $750 million.
Woodford Shale
The largest reduction in activity for Marathon Oil will be in its operations in the Mid Continent, where the company is developing the Woodford Shale in the Anadarko Basin. The company plans to operate two rigs here, down from the previous level of six rigs. Despite the cut, Marathon Oil is maintaining its 2012 exit rate production guidance of 10,000 BOE per day from here and believes that a two rig program will be able to convert the company’s leases from term to held by production.
Cimarex Energy (NYSE: XEC) has a much larger operation in the Woodford Shale and is active mostly in the Cana portion of the play due to the high level of natural gas liquids present in the production stream. The company spent approximately 44% of its capital budget in the Woodford Shale and drilled 25 net wells in the Cana play in the first half of 2012.
Cimarex Energy is dealing with lower commodity prices by shifting development toward plays that produce mostly crude oil. The company is targeting the Bone Spring in Texas and New Mexico where oil ranges from 79% to 87% of total production.
Bakken
Marathon Oil is also dropping three rigs from its Bakken development program and will operate five rigs here for the rest of 2012 and into 2013. The company still believes that it will exit 2012 with production of 30,000 BOE per day from the Bakken and drill enough to hold its core acreage here.
One exploration and production company that previously announced a reduction in its Bakken development program is Denbury Resources (NYSE: DNR). The company is currently operating four rigs in this play, down from a peak of seven rigs in 2011. Despite this reduction in activity, Denbury Resources is still seeing strong production growth in the Bakken and reported average production of 15,208 barrels of oil equivalent (BOE) in the second quarter of 2012, up 99% from the same period in 2011.
Niobrara
Marathon Oil also suspended further development of the Niobrara Shale in the Denver Julesburg Basin. The company cited lower economics associated with the cost of drilling and low productivity of Niobrara wells.
Bill Barrett Corp. (NYSE: BBG) is seeing different results in its Niobrara program in 2012 and has decided to add an additional rig to develop this play. The company plans to drill 23 net wells here during the year and reported that a recent Niobrara well had an initial production rate of 798 BOE per day.
Bill Barrett Corp. is making some adjustments to its development program as a result of lower commodity prices, and is stopping all drilling activity at one of its projects in the Piceance Basin in Colorado.
Conclusion
Lower commodity prices are reducing cash flow for Marathon Oil and other exploration and production companies, leading to reduced drilling of areas with marginal economics. This is a normal part of the drilling cycle and investors should not overreact to these trends.
shaleplays has no positions in the stocks mentioned above. The Motley Fool owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
