Crude Production Grows Despite Best Efforts, Woes Remain - Analyst Blog

The consistent weakness in crude prices has compelled a large number of energy firms to undertake measures ranging from reduction in capital spending to restructuring operations to tackle the situation. However, it has not had the desired effect, at least in the immediate present. On the contrary, several months of weakness still lay ahead.

In its latest update, the U.S. Energy Information Administration ("EIA") made an upward revision in its 2015 production projection. Domestic crude production in 2015 is expected to increase to 9.35 million barrels per day (bbl/d), slightly up from the previous guidance of 9.3 million bbl/d. The first two quarters of 2015 are anticipated to see a growth in production volumes, continuing the quarterly increase trend witnessed last year.

EIA expects West Texas Intermediate ("WTI") crude to average around $47 per barrel in the first half of 2015 which may render some areas as uneconomic. Moreover, onshore drilling activity is expected to see a decline. Several firms have already reduced 2015 capital spending and are directing the focus on core areas of key tight oil plays.

However, EIA expects that the projected 2015 prices should support drilling activities in selected regions like Bakken, Eagle Ford, Niobrara and the Permian. Companies with lower drilling and service costs could see promising drilling activity in these regions.

Moreover, EIA sees continued production growth from the Gulf of Mexico (GoM). New projects and expansion of existing ones as longer period investments in this region makes it less susceptible to immediate price fluctuations.

Five deepwater GoM projects had been started toward the end of 2014 - Cardamom Deep and Cardona projects operated by Stone Energy SGY , Jack/St. Malo operated by Chevron Corp CVX , Dalmatian operated by Murphy Oil MUR and Tubular Bells operated by Hess Corp. HES . Moreover, per EIA 13 field-startups are expected in the coming two years - eight this year and five next year. These are expected to add to the total volumes.

However, the revision follows EIA's previous announcement that oil production from the U.S. shale plays have slowed considerably. The second half of the year may be more promising, with projections indicating a slowdown in production growth. Also, EIA projects 2016 average production at 9.49 million bbl/d, down from last month's projection of 9.52 million bbl/d.

Bottom Line

With production continuing to rise and prices yet to find a bottom, uncertainty hangs large upon the broader energy sector. Finding an exact point of improvement and pricing trend reversal is difficult to predict at the moment.

However, we can safely say that upstream firms with lofty oil exposure look the most doubtful and it would be best to steer clear of the Zacks Rank #4 (Sell) or #5 (Strong Sell) stocks like LRR Energy, L.P. LRE , Clayton Williams Energy, Inc. CWEI and Sanchez Energy Corp. SN .

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

CHEVRON CORP (CVX): Free Stock Analysis Report

HESS CORP (HES): Free Stock Analysis Report

MURPHY OIL (MUR): Free Stock Analysis Report

STONE ENERGY CP (SGY): Free Stock Analysis Report

WILLIAMS(C)ENGY (CWEI): Free Stock Analysis Report

SANCHEZ ENERGY (SN): Free Stock Analysis Report

LRR ENERGY LP (LRE): Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.