Oil Giant Cuts Budget By 80 Percent And Suspends Fracking

Dave here. North Dakota is already in a technical recession, with two quarters of contraction. This will not exactly help.

By Charles Kennedy, a writer for Oilprice.com. Cross-posted from Oilprice.

Whiting Petroleum Corp. (NYSE:WLL), the largest oil producer in North Dakota, has announced that it will suspend all fracking in the state and cut its budget for this year by 80 percent in a move that sent its shares up 9 percent on Wednesday, back down to a record low on Thursday, and $4.02 Friday morning.

Across the E&P patch, it’s a volatile game of craps right now that has investors torn between responding positively to spending cuts to weather the oil price downturn, and negatively to the notion that all these companies are doing is narrowly avoiding bankruptcy.

As of 1 April, Whiting will halt all fracking and stop completing its wells at 20 Bakken and three Forks sites. By this summer it will cut spending to $160 million for the rest of year to fund maintenance.

These are some of the biggest spending cuts in the industry so far, and investors have responded positively to Whiting’s strategy for waiting out low oil prices.

“We believe this conservative strategy should help us to maintain our liquidity position and leave us well positioned to capitalize on a rebound in oil prices,” Whiting Chief Executive Jim Volker said in a statement carried by Reuters.

The news comes along with Whiting’s fourth-quarter results, which posted a net loss of $0.80 per share and revenues of $2.05 billion compared with 2014 EPS of $4.15 and revenues of $3.09 billion.

In an earnings call on 25 February, Whiting noted that its production for the fourth quarter averaged 155,210 barrels of oil equivalent per day, and that enhanced completion designs in the Williston Basin drove performance by delivering 22 percent production increases quarter over quarter on a per well basis.

“Despite the sharp drop in commodity prices, our proved reserves increased 5 percent to 821 million barrels of oil equivalent, even after 53 million barrels of oil equivalent of asset sales which equated to almost 7 percent of our year-end 2014 reserves,” Whiting executives noted.

The company sold $512 million of assets last year, ending the year with $2.7 billion of liquidity. It’s also in a better position despite all the setbacks because it doesn’t have any bonds maturing until 2019, and will not be negatively affected by the “March madness” that is threatening other producers.

“Our 2016 plan is designed to maximize current and future returns and preserve balance sheet strength. We’re decreasing CapEx by 80 percent from 2015 levels and adjusting our activity levels to four rigs versus our monthly average of 11 in 2015 and our high of 25 rigs in 2014,” according to Whiting.

Whiting said on Thursday, a day after reporting its quarterly results, that if oil prices recover back to the $40-$45 per barrel range, it would consider completing some of its wells.

Whiting has some 667,000 net acres in the Williston Basin in North Dakota and Montana, and the wells put on hold there were just in the planning stage. But the side effects of a move like this mean that it will also be putting on hold a pipeline project slated to be built by Tesoro Logistics.

The debt picture might look better, but Whiting’s shares have suffered more than some of its key peers. Shares have slid 63 percent since the beginning of this year.

On Thursday, Whiting’s shares opened at $3.53, its one-year low. The company has a one-year high of $41.57. In Wednesday trading, the company’s shares had jumped 9 percent on news that it would suspend fracking.

Whiting is slashing spending and appeasing investors as much as it can, but right now it’s all about avoiding bankruptcy for this company and its peers as the waiting game continues.

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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. sd

    No mention of labor at all. As if they do not form any part of the equation. So, how many workers were “suspended” and how will that suspension impact the local economy.

    1. diptherio

      See Dayen’s note at the beginning of the article. The local economy is already circling the drain and this is going to make things worse.

      I know a good number of people who have gone to Williston to work, since the wages are considerably better than the going rate in other parts of Montana, even if you have to live in a “man camp” [shudder]. Reductions in production means reduction in labor needed, which means that this slow-down will have economic consequences beyond just ND. Montana will be losing “remittances” from this as well.

      More specifically, the affected economies will experience a decrease in demand at businesses (since there are fewer wages to spend) and a reduction in tax-revenue by the local/state governments due to lower income, corporate and sales taxes.

      So, likely outcomes are higher unemployment and fewer resources for the state to confront that problem. Double whammy.

  2. Cry Shop

    Energy around the world is up the creek. China still has 1/3 of it’s new nuclear reactors off-line due to lack of demand on grid. These nuclear units were to help China reduce it’s CO2 footprint, but running all of them would result in even more coal related layoffs, as even more thermal plants would have to go off line.

    China expects to lay off 1.8 million workers in the coal and steel sectors as part of its efforts to reduce industrial overcapacity, Yin Weimin, minister of human resources and social security, said Monday.

    Yin said capacity cuts will lead to some layoffs in 2016 but said he was confident of keeping employment stable this year despite downward pressure on the economy, Reuters reports.

    No timeframe was given for the 1.8 million layoffs.

    China aims to remove around 500 million tonnes of coal production capacity within the next three to five years and halt approvals of all new projects.

  3. Clive

    While fracking is the poster-child for high-cost oil being whacked, a lot of other production with big fixed costs (which is basically anything other than the “stick a straw in the ground and you get oil coming out” sources) is also being hit hard. The North Sea is a good example of where they have to keep pumping because the decommissioning costs are immense so it is either lose a moderate amount of money on each barrel that you bring up or loose a huge amount money in a one-time hit by writing off production assets which were supposedly going to have an economic life of decades.

    But it is decimating http://news.stv.tv/north/1344300-north-east-benefits-claims-soar-in-wake-of-oil-downturn/ regional economies here in the UK with exposure to the North Sea oil production.

    Saudi Arabia (and, to a lesser extent, Russia) can stay irrational longer than the high cost producers can stay solvent though. In the end, they’ll win. So maybe not so irrational after all.

    1. PlutoniumKun

      Yes, the key issue is the difference between average cost and marginal cost for production. North Sea Oil was a big money loser throughout the 1990’s – they pretty much stopped exploration, but with sunk costs and a need to keep turnover, the big production rigs kept going despite making losses for well over a decade. My brother is an off-shore driller and at that time he and nearly all his colleagues ended up travelling from the ‘stan to the Gulf of Mexico to try to earn some money. It wasn’t just the loss of jobs – everyones wages were cut to the bone with no bonuses, so this has a knock-on effect right through the local economy.

      Fracking is most vulnerable to low prices because of the constant need for capital infusions to keep production up. A fracked gas well has about 18 months of full production, a fracked oil well about 2 years. Many of the companies will also have a certain number of fracked but plugged wells as back-up. So its hard to tell how long frack production companies can keep going, but its certainly not long. Oil sands and bitumen sands are significantly less capital intensive (they are basically just open cast pits with lots of big trucks running around), so they have more flexibility in ramping up and down production. Of course, Saudi oil is the cheapest of all to produce – its pretty much just the cost of keeping the pumps going (although to prolong the well life they also need capital investment in fracking and other techniques, but that type of operation can be postponed. I suspect that nearly all off-shore, especially the pre-salts off Brazil has been wiped out as a going concern – it will take years of sustained high prices to convince investors to take the risks involved.

      So yes, SA can stay irrational longer than most – although I suspect the Russians, with a more diverse economy can stay longer than anyone had guessed. The frackers have lasted longer than I think anyone in the industry thought they would – mostly I think because of a terror among the financiers of what happens if they start collapsing – its the old story of the bigger the debt you have, the more power you have over your creditors. But I think from other sources the process has already begun of companies quietly doing debt for equity swaps which will keep the companies going, although its unlikely we will see a major infusion of investment into fracking for a very long time.

      1. ambrit

        I mentioned earlier in the year the man I ‘sort of knew’ who lost his job on an offshore to Brazil rig last fall. Brazil isn’t the only ‘marginal’ field around. How many of these ‘marginal’ fields were sold to the locals as the ‘cure’ for what economically ailed them? The political fallout from these broken promises hasn’t begun to arrive yet. Expect extra instability in some regions that can least afford it.
        As for knock on effects, an anecdote. This past weekend Phyllis and I cruised around our neck of the woods visiting garage sales. We found some good stuff. One house, a three bedroom, two bath brick home on two acres was having an ‘inventory reduction sale.’ Points to the couple for humour. They were trying to sell this home because they couldn’t afford the mortgage any more. He had lost his offshore job last year and settled for something related that paid roughly half of his previous compensation. “I’m now travelling down to the coast five days a week, (about 75 miles one way,) and we found an affordable place to do a lease purchase deal on near there. We now have to figure out how much of a loss we can afford to take on this place. We’ve been here twelve years.” Comparable houses in their neigbhourhood are going, if they sell at all, for $150,000 to $200,000 USD. It was a nice area. I spotted fresh deer tracks on the edge of their back yard.
        So, as the above will attest, the U.S. can stay irrational for quite a while also.

    2. Steve H.

      – …can stay irrational longer than the high cost producers can stay solvent though. In the end, they’ll win. So maybe not so irrational after all.

      – …the bigger the debt you have, the more power you have over your creditors.

      Two nonintuitive inversions which have a lot to say about both economics and politics. Thank ye both.

    1. rjs

      Whiting has been the top producer in the Bakken, the most productive field outside of Texas…in addition, Continental Resources, the # 2 Bakken producer, took the same action…moreover, Chesapeake Energy, the 2nd largest US natural gas producer and the operator of more than half of Ohio’s wells, and has quit drilling here; in fact, it has stopped drilling new wells in both the Marcellus and Utica Shale basins altogether, having released its last two Ohio rigs and its last Pennsylvania rig before the end of 2015…the company is trying to downsize in lieu of bankruptcy, and is planning to sell off its wells and land in a last ditch effort to stay solvent…

      in contrast to Whiting and Continental, who are deferring completions while they wait for higher prices, Chesapeake, with their back against the wall with bonds coming due and facing $1 billion in collateral calls, is going to focus on more well completion and less drilling…they also expect to sell assets worth between $500 million to $1 billion, and cut overall spending by 57%…so they’re in the unenviable position of producing the most gas they can with gas prices at 17 year lows, and trying to sell off their natural gas and oil assets when prices for both commodities are at multi-year lows..

      1. Optimader

        Top producer = bagholder of large stranded investment in some of the most expensive petro production in the market.
        Investment equivalent of revolver in mouth

        1. cnchal

          Revolver for whom? A murder is made to look like suicide.

          Here is an older explanation of MLP’s, from David Cay Johnston, but highly relevant now.

          While you may not have heard about MLPs, readers of Barron’s and other publications for savvy investors have. In approving cover stories, Barron’s and other investment journals tout MLPs as a way for investors to earn returns of 8 percent or more each year while paying little or no income tax.

          In the shadows, business can use government to drill holes into consumer and producer pockets through inflated prices. Now one industry has applied this to taxes. This column casts a focused light on such activity to encourage disclosure, integrity, and fairness in taxation.
          All that is needed to expand this tax shifting is a change in federal law — a change so minor it does not even require a sentence to be added to section 7704 (d)(1)(E), a list of industries that can be owned through publicly traded partnerships without being subject to the corporate income tax. As one lawyer deeply involved in the pipeline case told me: “The electric utilities would be master limited partnerships now except that when the law was changed, the Edison Electric Institute was uncharacteristically asleep at the switch.”

          David lays the whole scam bare. Basically, the Pirate’s taxes are paid through your rates, even taxes that might not need to be paid are collected.

          MLP’s are managed by Pirate Equity and funded by Muppets, and the other day an interesting link popped up.

          . . .Take a midstream gathering asset. It costs $50 million to build and produces $15 million in annual DCF or a 30% return—not bad. At a 10% disposition yield, it is worth $150 million. Sell it to the MLP for $150 million and voila, you have a $100 million gain on sale. The MLP borrows $150 million on the revolver at 5% and then has $7.5 million in incremental DCF with no dilution. Talk about successful financial engineering. At the LP level, it looks like the sponsor has done the LPs a favor by creating extra DCF and the press release can brag that there has been NO DILUTION, only an increase in the distribution—which makes shareholders happy—even if a good chunk of that goes back to the sponsor through the IDR.

          Now look beneath the numbers a bit, the sponsor has taken all the real gains and the MLP has taken all the risk. The sponsor got a $100 million gain on sale along with an increase in the IDR. The MLP got an incremental $7.5 million of DCF with leakage through the IDR and now has $150 million of additional debt. That’s a very un-equal bargain. Meanwhile, in the 20 years that it takes to pay off the debt through DCF, the energy field has probably been depleted to the point that the midstream asset is stranded and practically worthless. It’s Ponzi-finance at its apex. . .

          It looks like a lot of pensions were herded into pipelines, with the Pirates getting all the profit with pension funds taking the risk, and now gasping for money.

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