Shale Firms Pumping Oil With New Tech, Practices

Crude has fallen back down after teasing producers earlier this year with prices above $60 a barrel, but EOG Resources and other shale players still see opportunities for strong results with improvements in drilling techniques and technology.

In the past week, top shale firms have reported steep cost cuts and lower capital spending forecasts while increasing views on production, even as U.S. oil prices have dipped back below $50 a barrel.

"The price environment is making shale producers sharpen their pencils to their cost structure even more," said Brian Youngberg, an energy analyst at Edward Jones. "The learning curve in shale has been very steep. They continue to wring out costs.

EOG (EOG) more than doubled its net resource potential in the Bakken and Three Forks plays to 1 billion barrels of oil equivalent from 400 million BOE due to "down-spacing" and advances in completion technology, though it maintained its 2015 production guidance.

Oil Rig Count Heads Back Up

Down-spacing is the practice of drilling wells closer together, to fit more wells in a single plot. When done properly, the wells will boost production from a field without siphoning off oil from each other.

In a conference call Friday, EOG said it has also tested closer spacing patterns in the Delaware basin of the Permian formation in Texas with success.

Such techniques have helped push the number of oil rigs in use back up after collapsing in the last year. The U.S. oil rig count has increased for three straight weeks, climbing to 670 rigs as of Aug. 7, according to Baker Hughes (BHI). Rigs in the Permian have been rising for several weeks, and the Williston basin count in the Bakken play has been rising for the last month.

Carrizo Oil & Gas (CRZO) said down-spacing could add 50 more net drilling locations, and Marathon Petroleum (MPC) said it's testing down-spacing in the Bakken.

EOG is also using geosteering advances in the Bakken. The technology gives drillers real-time information and models to steer a drill bit so it stays in the optimal drill zone, making drilling faster and more effective.

Another technique EOG highlighted is high-density fracking, or the use of high-density frac sand volumes to get more crude out of wells. The company thinks the new efficiencies it and other firms are seeing will be sustainable and lead to "strong growth for years to come.

Can Cash Keep Flowing Too?

Producers had already focused their drilling on the most productive parts of a shale play, in a practice known as high-grading.

EOG said returns on wells were better at $65 per barrel earlier this year than at $90 three years ago. But on Friday, U.S. futures fell 1.8% to $43.87, and Brent futures settled at $48.61.

So even with recent cost improvements, they still may not be enough to keep up with oil prices. Continental Resources (CLR) CEO Harold Hamm said Thursday that if U.S. crude prices are at $60 a barrel, cash flow would be neutral. But below $50, the company would outspend cash inflow by $150 million-$200 million in the second half of this year, without more cost cuts.

But Continental Resources has slashed cutting drilling and completion costs for most operated wells by 20% since the end of 2014, with another 5%-10% in reductions seen by year's end.

Continental is also looking at new plays, and Hamm was bullish on its first well in central Oklahoma's STACK play, which he compared favorably with the company's Bakken shale assets.

Still, the industry is looking at a a prolonged downturn, with BP (BP) and Goldman Sachs (GS) analysts seeing prices staying "lower for longer.

"I think they are preparing for the worst and hoping for the best," Youngberg said of shale producers. "But it looks more and more like shale is pretty resilient. But in the long run neither OPEC or shale can survive on $50 oil."