Hit by rising labor and other costs, Occidental Petroleum is moving some of its rigs out of the Bakken Shale Play in North Dakota.  The pull out comes at a time when other explorers are flocking to the region attracted by high oil prices and looking to cut exposure to natural gas. Occidental, one of the major players in the Bakken play, announced its plans to reduce exploration in the region as analysts expect costs to finally start dropping as oilfield services players like Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) loose some of their bargaining position in the pricing of pressure pumping services and new technology makes exploration more economically feasible.
We have a $42.93 price estimate for Halliburton, which is at a 40% premium to its current market price.
According to some estimates, pricing of pressure pumping services could fall by 10% in oil rich plays like the Bakken shale over the next six months, despite the rising interest in liquids extraction.  Industry capacity in pressure pumping has grown by over 250% over the past 3 years and lower exploration in gas plays is forcing players to concentrate on liquid plays. Pricing for the service has dipped by 25% in gas plays over the past few months. However, despite this, players in the Bakken play have been hit by rising labor costs and an increase in the price of some crucial raw materials such as sand and gaur. Although analysts expect costs for some of the inputs to fall over the future, Occidental’s pull out is forcing players to take a closer look at the economics of drilling new wells and explore alternatives to cut costs.
Halliburton’s margins are set to see a decline in the year because of falling pricing as well as a rise in input costs. Rising prices could be passed on to customers with a roll over in long term service contracts with explorers.
Players in the Bakken shale report that the cost of drilling a well is between $6 million to $8.5 million and the break even price of the crude produced is estimated to be between $55 to $70 a barrel.  At present Bakken Crude is being offered at around $93 / barrel, allowing for a 15% return according to some estimates. Other explorers are also banking on new technology and other initiatives to lower costs further, making Occidental’s pull out seem like a one-off maneuver. However, if drilling costs shoot up in the future, because of new environmental regulations or higher raw material costs, more players could look to pause production in the Bakken play, which is currently the major story for onshore exploration in the North American market.
- Baker Hughes Relies On Oil Exploration As Gas Rig Count Falls (trefis.com)
- Baker Hughes Ramps Up Oil Fracking on Low Natural Gas Prices (trefis.com)
- Chesapeake Trouble, Credit Squeeze Could Hurt Oilfield Services Sector (trefis.com)
- Insight: Peak, pause or plummet? Shale oil costs at crossroads, Reuters [↩] [↩] [↩]