Comments: At What Price Profitability?
Authors: Donnelly John 
Published: August 2017

Editor's column
Consensus is growing around the idea that oil prices will fluctuate in the $45–60 bbl range, both in the short term and perhaps even for the long term. This has led to a rash of studies about what this means for operators and service companies in the “new normal.”
On the operator side, much of that depends on what oil price translates to profitability, both in the unconventional and conventional sectors. Some anecdotal evidence is trickling in. Public companies reported second quarter earnings in late July and early August. According to earnings reports, 15 of the largest shale producers posted total net losses of $470 million. During that time (April–June), WTI oil prices averaged $48/bbl. That was a marked improvement over the past quarter and past year. Those same companies reported total losses of $3.7 billion in the first quarter of 2017 and losses of $7.4 billion in the second quarter of 2016. The financial improvement in the second quarter came from more efficient operations, cost cutting, and a rise in oil prices.
But at what oil price are shale producers profitable? Analysts have thrown around figures of as low as $40/bbl, but a detailed study of the issue by consultancy Wood Mackenzie sheds new light on the subject and is examined on page 47 of this issue. The consensus is that $50/bbl brings most companies closer to profitability than $40/bbl, but perhaps needs to be over $50/bbl to be sustainable.
Operators are taking the “lower for longer” outlook seriously and are adapting. Occidental Petroleum announced that it was tying a company-wide compensation plan to the firm being profitable at $40/bbl. Some of the largest majors are beginning to sanction projects once again—although cautiously. More new oil and gas fields were given the green light in the first half of this year than in all of last year, including projects by ExxonMobil, Shell, and BP. But about three-fourths of those conventional projects are expansions of existing fields or satellite developments that tie back to existing pipelines and platforms, according to Wood Mackenzie. Shell, for example, is now tying its Kaikias project in the US Gulf of Mexico to its existing Ursa production hub to limit costs. When BP reported its earnings, Bob Dudley, the company’s chief executive, said the firm was planning on the basis of oil prices being at current levels for the next 5 years. Noted oil historian Daniel Yergin agreed, adding, “The industry is in the middle of re-engineering its processes and its technologies to be a $50/bbl industry, not a $100/bbl industry.”
Major oilfield services companies Halliburton, Schlumberger, and Baker Hughes reported increased revenue for the second quarter of 2017 compared with the first quarter, with revenue up 15.8% for Halliburton, 8.2% for Schlumberger, and 6.3% for Baker Hughes. Halliburton earned a slight profit while the two other companies posted net losses. Dave Lesar, chairman of Halliburton, sees a bit of a slowdown coming in shale, saying that producers were “tapping the brakes” on drilling as oil prices remain under $50/bbl and the global supply glut appears to have life left in it.