American Oil and Gas Reporter - January 2015 - 68

Outlook 2015
From yet another quarter, in a market outlook issued Dec. 9,
Bank of America Merrill Lynch Global Research projects an average WTI price of $72.00 in 2015. And in a mid-December article in the Economic Times of London, Sabine Schels, an energy analyst at Bank of America, said, "We expect a pretty sharp
rebound to the high $80s or even $90 in the second half of next
year."
Respondents to The American Oil & Gas Reporter's annual
Survey of Independent Operators, which was conducted between
Nov. 10 and 21, indicated they were basing their 2015 drilling
plans on a WTI crude oil spot price (delivered at Cushing, Ok.)
of $80.00. (Editor's Note: At press time, NYMEX crude prices
for the week of Jan. 5-9 averaged $48.77.)
AOGR mails its Survey of Independent Operators to producers nationwide selected at random from the magazine's subscription list. No attempt is made to identify survey respondents, and
AOGR staff compile and analyze the data.
Big Is Better
For the record, survey respondents indicated they planned to
drill 9.4 percent more wells in 2015 than they did in 2014, based
on a WTI spot price of $80.00 a barrel and a wellhead natural gas
price of $3.86 an Mcf (see Figure 1).
However, there is a wide spread of expectations among the difFIGURE 1
Change in Operators' Planned 2015 Drilling
Compared with 2014 Actual Drilling
25

23.2
Percentage Change

20
15

15.6

9.4

ferent categories of survey respondents. Category one respondents
(those who anticipate drilling fewer than five wells this year) expect to drill 9.2 percent fewer wells in 2015 than they drilled in
2014. At the other end of the spectrum, category two respondents
(those who plan to drill between five and 12 wells this year) project a 23.2 percent increase, while category three respondents (those
drilling more than 12 wells in 2015) project a 9.4 percent increase.
Size does seem to make a difference in the 2015 survey. A small
subset of the larger category three drillers accounted for 5.3 percent of survey respondents but 71.7 percent of 2014 wells reported by all survey respondents and 67.7 percent of 2015 wells. These
very active drillers project a 3.3 percent increase in 2015
drilling, suggesting that the smallest independent operators are
hurt most by falling prices and are the quickest to respond. Those
in the middle, perhaps, have stronger cash flows and/or investor
backing, and reflect that famous "independents' optimism," while
the largest companies have the ability to "stay the course," regardless of short-term price swings.
Supporting that theory is an analysis published in the Dec. 15
Oil Daily, which notes that "price pain has been most acute for
smaller independent producers. A growing list of companies is
slashing spending by nearly 50 percent next year."
At the same time, the analysis continues, cuts by larger independents range between 14 and 26 percent.
An analysis posted on StreetInsider.com by Barclays analyst
Thomas Driscoll suggests large independent operators are "better positioned than many investors believe them to be. Cash flows
should be cushioned somewhat by continued (oil) volume
growth. At $70 a barrel WTI, we estimate large-cap E&P cash
flows will be down approximately 20 percent in 2015. Accounting for hedge positions among the large caps, we expect 2015 cash
flows will be down about 15 percent. The impact of lower commodity prices will be somewhat, but not fully, offset by continued production growth."

Pricing Analyses

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Category one respondents are those that plan to drill fewer than
five wells in 2015. Category two respondents plan to drill five
to 12 wells this year, while category three respondents will drill
more than 12 wells in 2015. Respondents included in the "oil"
category targeted crude oil on more than 50 percent of their
2014 wells, while all respondents that indicated they drilled any
natural gas wells in 2014 or plan to drill any in 2015 are included
in the "gas" category.

68 THE AMERICAN OIL & GAS REPORTER

There is another old maxim about fine print, and price projections come with caveats. In looking at its 2015 oil price predictions, EIA comments that the values of futures and options contracts suggest high uncertainty.
"WTI futures contracts for March 2015 delivery, traded during the five days ended Dec. 4, averaged $67 a barrel," the agency
details. "Implied volatility averaged 32 percent, establishing the
lower and upper limits of the 95 percent confidence interval for
the market's expectations of average WTI prices in March 2015
at $51 and $89 a barrel, respectively. Last year at this time . . .
implied volatility averaged 19 percent. The corresponding low-

American Oil and Gas Reporter - January 2015

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