With Higher Oil Prices and Service Costs Down, Why Continue Deferring Well Completions?

Back in January we first touched on how contango in the futures curve could entice producers to defer well completions with our article “Will Oil Price Contango Defer Well Completions?”  Since that time, numerous producers have announced plans to defer well completions, some pushing back all the way to 2016.  Deferred completions have added a new variable to the art/science of production forecasting, and any honest analyst will tell you that predicting the true inflection point of oil production in this market is nearly impossible because of their effect.

However, with the front end of the oil futures curve now at a level not expected to be seen until late 2016 only three months ago [see figure below], and service costs that have reportedly dropped 20-40% already (Halcon reported well costs down 30% from Q4 average this morning), what incentive is there to continue to defer well completions?

Slide1

The chart below shows the result of the offsetting effects of waiting for higher oil prices versus the time value of money effect of delaying the cash flow from new wells.  Note that we assume 25% lower well completion costs as compared to year-end 2014 for the first two scenarios, and 35% lower well completion costs in the third.

Slide 2

We see that deferring well completions nine months to capture the contango in the forward curve doesn’t offset the time value of money effects of the delay unless we are to see at least another 10% reduction in well completion costs.  So the real question appears to be, why are oil producers continuing to defer completions?

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Kathryn Downey Miller is President of BTU Analytics where she leads the firm’s consulting and analytics groups in delivering market advisory services to clients across all sectors of the industry. Additionally, Kathryn oversees strategic planning, financial budgeting and analyst development for the company. Prior to founding BTU Analytics, Kathryn built market expertise in a diverse set of prior industry roles, including buyside investment research at an energy focused hedge fund, energy market fundamentals consulting at Bentek Energy, investor relations strategy consulting for E&P companies and investment banking at Citigroup. She speaks frequently at industry events on North American energy markets and is a CFA charterholder.

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