Credit: Shutterstock photoYesterday it was announced that economic sanctions would be lifted from Iran that would allow the nation to attract investment into its long-isolated energy sector. The lift of the sanctions and the ability to attract investment is significant because it means Iran will be tapping into the country's oil supply, which is the world's third largest, and add supply to an already majorly oversaturated oil market.
The likely addition of supply from Iran into the already oversaturated market will be another barrier to the rise of oil prices that have remained low for some time now. This lowered price market does not have a major effect on conventional oil suppliers, but the lower prices do create major ramifications for the shale oil producers of the United States.
Shale oil companies are extremely vulnerable to a low price market because of the nature of their productivity over time. Shale oil production is much different than conventional oil production from places like the Middle East or the North Sea, and it produces unique challenges for the companies that produce oil from shale. Conventional oil wells have an operation life much longer than that of shale, typically seeing production only fall by less than 5% each year, which allows these wells to reliably produce oil for decades.
Shale oil wells on the other hand typically will lose more than 70% of their output within its first 2 years. This short window causes shale oil companies to continually have to find and drill new wells in order to maintain or increase their output levels. Major debt has been accrued by shale oil companies due to this ongoing need to drill new wells and as of the end of May 2015, 4 shale oil companies have had to declare bankruptcy.
As the sanctions are lifted from Iran and the country's oil production increases, the world's oil market will be oversaturated even more than it already is, which will likely keep oil prices low, and the U.S. shale oil companies will have to adapt. Companies have already started to close their oil producing rigs in attempts to cut their costs. Last week there were 645 rigs in operation, which is down from figures of 1,609 rigs in operation in October 2014.
The closing of these rigs has caused the Energy Information Administration (EIA)to call for record drops in production during August 2015. According to the EIA,output from Eagle Ford, the 2 nd largest U.S. field, is expected to fall 55,000 barrels a day to 1.54 million, approximately 10% lower than peak output this past March. The EIA also expects output to fall in the Bakken region of North Dakota by 22,000 barrels a day to 1.18 million.
Many members of the shale oil industry remain confident though, as they say solutions for increasing efficiency and lowering costs are being found faster than productions levels can decline. The U.S. shale oil industry still will be hoping and watching for increases in oil prices in the coming months though, and as they do so, investors can keep watch of the following stocks that are surely to be affected by the present and futures challenges and adaptations coming to the industry.
Marathon Oil Corporation (MRO): Current Zacks Rank #3 (Hold)
The Marathon Oil Corporation (MRO) is a leading exploration and production company with extensive operations across four core regions-Africa, Middle East, Europe, and North America-and as of the end of 2014 had approximately 2.2 billion oil-equivalent barrels in proved reserves. The company has holdings in both Eagle Ford and Bakken Shale which makes the company susceptible to changes in the market for shale oil. As a larger company will holdings in a multitude of regions Marathon Oil is not as dependent on shale oil as other companies may be though, allowing for the company to still be successful in a market with lower prices.
Continental Resources (CLR): Current Zacks Rank #3 (Hold)
Continental Resources (CLR) is a crude-oil concentrated, independent oil and natural gas exploration company with operations in the Rocky Mountain, Mid-Continent and Gulf Coast regions of the United States. The company is especially susceptible to lower priced oil market as it is a domestic company and is the leading shale oil producer in North Dakota's Williston Basin.
Southwestern Energy Company (SWN): Current Zacks Rank #3 (Hold)
Based in Houston, Texas, Southwestern Energy Company (SWN) is an energy company that engages in the exploration, development and production of natural gas and crude oil in the United States. The company is one that will likely feel the effects of a lower price market because of its extensive holdings in Arkansas' Fayetville and Pennsylvannia's Marcellus shale deposits, in addition to the fact that it is domestically based and focused.
EOG Resources Inc. (EOG): Current Zacks Rank #3 (Hold)
EOG Resources Inc. (EOG) is engaged in the exploration, development, and marketing of natural gas and crude oil primarily in major producing basins in the U.S., as well as Canada and Trinidad. The company has substantial exposure in Texas' Eagle Ford and North Dakota's Bakken reserves, which make it another company that will likely strongly feel the effects of a lower price market. While having holdings in other places, EOG's strong presence in the U.S. still makes it susceptible to the challenges brought about by shale oil and the market's lower prices.
Bottom Line
While oil prices lingered around $60 a barrel in May and June, it has been estimated that the break-even mark for shale oil producers is about $65 a barrel, which means as long as there are barriers that keep oil prices down, U.S. shale oil producers will likely continue to suffer. While it was unclear if prices would increase or not, the recent news of Iran's likely additional output certainly does not help the already oversupplied market that has kept oil prices as low as they have been.
U.S. shale oil companies are confident in the speed at which efficiency increasing and cost cutting technology will be created and used, the U.S. shale oil industry faces a somewhat bleak future if oil prices are going to stay at the low level they have been at. Be sure to keep a watchful eye on the companies above in addition to the industry as a whole as time moves forward.
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MARATHON OIL CP (MRO): Free Stock Analysis Report
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EOG RES INC (EOG): Free Stock Analysis Report
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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.
