APA Executive Suggests Higher Crude Oil Prices are Coming

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Crude oil prices have been choppy but rangebound for much of 2024, whipsawed by inflation concerns, the Federal Reserve's stance on interest rates, wars in the Middle East and Ukraine and the upcoming presidential election, but prices may be poised to rise as global demand continues to rise and U.S. productivity gains flatten, a speaker told about 1,000 attendees at the 29th annual EnerCom Denver conference August 19. The event was sponsored by EnerCom Incorporated (Denver, Colorado).

Ben Rodgers, senior vice president for finance and treasurer at APA Corporation (NASDAQ:APA) (Houston, Texas), noted that crude-oil prices "have been volatile this year, and investors are the most bearish they have been in years, since COVID. This kind of volatility tends to limit future price declines--how low can they go?--and may lead to an uptick in prices."

He noted that global demand for oil was at an all-time high, about 104 million barrels per day (BBL/d), and he fully expects that to continue for a few years, with demand growing in 2025.

In the U.S., he continued, productivity gains per rig have flattened in recent years, suggesting continued production growth in the Permian Basin is not as sure a thing as it has been in recent years. "Efficiency gains may be challenged going forward," he said, noting that the Permian has accounted for about 60% of all U.S. crude oil production growth in recent years.

Click on the image at right to see a graphic of flattening of production per rig in the Permian Basin.

EnerCom Managing Director Larry Busnardo agreed with Rodgers that an era of "flattish" U.S. oil production is coming. He urged attendees to maintain capital discipline as they "digest and divest" assets.

In the U.S., APA's Rodgers continued, many of the most promising drilled but uncompleted (DUC) wells have been completed in recent years, leaving that cupboard relatively bare for future production growth.

"I expect a constructive and rangebound crude oil market in 2025," the APA executive continued, without providing a price range. In this context, "constructive" is a euphemism for "favorable," suggesting higher prices driven by supply-demand fundamentals.

Rodgers criticized the widely used term, "energy transition," claiming "energy expansion" would be a more accurate term for what is going on in energy markets right now. "Demand for crude oil will be around for decades to come," he asserted. "You can't meet all future growth through mergers & acquisitions," though APA recently closed on a multi-billion-dollar acquisition of Callon Petroleum, which increased APA's operations in the Permian Basin.

While one implication of Rodgers' talk, that the flattening out of productivity gains suggested it was time for the industry to increase its drilling activity, he also cautioned EnerCom attendees that, "it's not 2012 anymore, where people drilled to increase production." Instead, what drillers needed to do was focus on profitable drilling opportunities. One way to do that was by reducing cost structures in case his predicted uptick in pricing doesn't happen right away.

Several speakers at the event highlighted their cost-reduction efforts in recent years, lowering lease-operating expenses (LOE), reducing capital expenditures (capex) and slashing general & administrative (G&A) outlays.

An executive at Civitas Resources Incorporated (NYSE:CIVI) (Denver, Colorado) said the company had lowered its well costs by 10% per lateral foot through casing design improvements, labor force optimization and other enhancements. The producer has cut drilling times by one week per well, partly by running its fracking pumps 22 hours per day, up from 18 hours per day when another company owned those assets. It also is drilling longer laterals, up to four miles in length, 33% longer than was previously the case.

"We have made massive advancements, and there are massive opportunities," the Civitas executive said. "We are laser focused on cost reductions and margin enhancements."

Another EnerCom speaker, Paul McKinney, chief executive officer of Ring Energy Incorporated (NYSE American:REI) (The Woodlands, Texas), also extolled operational efficiencies the company has captured: "Lowering our cost structure is a constant for us," including reducing its G&A outlays as well as its LOE per barrel of oil equivalent," he told attendees on Monday.

Ring Energy, which operates in the lower-cost areas of the Permian Basin, has grown through acquisitions in recent years, and its stock is up 35% this year, well ahead of its peers, McKinney said. "The market is beginning to recognize what we're delivering." One way it watches its pennies is by staying out of high-cost acreage in the Midland and Delaware basins. "All the land in those areas is locked up by the Big Boys, and there's high entry costs." That's why the company operated in the Central Basin Platform and Northwest Shelf areas of the Permian.

The company, which produces about 20,000 barrels of oil equivalent per day, is looking to make further acquisitions in the Permian. "Improving operational margins leads to higher returns and pursuing strategic acquisitions of high margin assets leads to sustainable higher returns," he told conference attendees.

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