Barclays Sees Lower Costs Boosting Oil Production In 2015

Barclays analyst Thomas R. Driscoll issued a report on oil Friday re-examining the cost of oil production and claimed that “lower supply costs will enable the U.S. producers to continue growing volumes despite a sharp pull back in CAPEX.”

Driscoll thought “average liquids production will be 12-15 percent higher in 2015 relative to 2014. The 2015 exit rate will be 10 percent higher than 4Q14.”

“We estimate producers earned 6-9 percent returns on new capital at $95 crude, but they can now do the same at $60/bbl, and perhaps lower. Many investors have looked only at field level direct cost and concluded backward looking supply costs have been $70-80/bbl. We vehemently disagree. Most supply curve analysis is deeply flawed as it ignores indirect costs such as overheads, infrastructure and sunk costs. Future efficiency gains are also left out of most cost analyses,” according to Driscoll.

“Concerns around industry-wide leverage, liquidity and financing capacity are overblown. The relative financial health of the U.S. E&P industry is somewhat misunderstood. Over 70 percent of oil volumes are generated by companies with investment grade credit ratings. The top 10 producers account for nearly half of all volumes.”

Driscoll concluded that “current share prices reflect expectations of +$75/bbl oil next year and beyond. Given plummeting U.S. tight oil supply costs, we think a recovery towards that price level could be delayed.”

EOG Resources Inc EOG was named as a Top Pick and Driscoll favored “high quality names with best in class acreage and strong balance sheets.”

EOG Resources Inc recently traded at $86.43, down 0.52 percent.