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Harold Hamm Expects $60 Oil, Says America Will Double Output Again

News Article by Northern Tool

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Any hope of Russia and Saudi Arabia agreeing to an oil production cut is nothing but a daydream. Industry layoffs are continue. The U.S. rig count has reached a new low, down to 591 from 1,285 at the peak. Even Chevron CVX -3.66%reported a surprise loss for the fourth quarter — when oil prices were at least a little higher than now. More than $60 billion worth of outstanding oil company debt is already in distress or default, with another $50 billion rated B, or well below investment grade. Particularly disturbing for equity investors: according to Bernstein Research the average U.S. exploration and production company are still priced as if oil prices were $58 a barrel. West Texas Intermediate closed last week at $33.62.

At times like this it helps to turn to a reliable bull. So last week I paid a visit to Harold Hamm at the Oklahoma City headquarters of hisContinental Resources. Hamm (as detailed in this 2014 Forbes cover story, and this follow-up a year ago) has been one of the true pioneers of the Great American Oil Boom. At the peak of his fortunes Hamm’s controlling stake in Continental was worth upwards of $18 billion. It’s since fallen back to $4.5 billion.

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We sat down for a chat the day after Hamm announced that Continental would slash its 2016 capital spending to $920 million — a 66% cut from last year’s level. His objective is for Continental to live within its cash flow for the first time in years. Assuming an average oil price of $40 a barrel, Continental expects its new plan to generate excess cash flow of $100 million in 2016.

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“Some people didn’t pull back as fast as they should have,” says Hamm. “They are pulling back now.” Hamm’s move represents capitulation of a sort. In late 2014 he decided to sell off all of Continental’s oil price hedges for $400 million, betting that prices would soon recover. They didn’t, and Continental missed out on about $700 million in proceeds that those hedges would have generated. No surprise, he’s even more bullish now. Prices are “unsustainable,” he says. “People aren’t making any money.”

These bad days won’t last. America’s oil output has already turned down from 9.6 million barrels per day to 9.2 million bpd. Hamm, backed up by analysis from his resident team of data eggheads, expects the declines to accelerate as drillers capitulate. Each passing month will shave another 125,000 bpd off U.S. output — adding up to about 1.5 million bpd this year. As it happens, that’s almost precisely the same amount of oversupply currently sloshing around world markets, according to Energy Aspects, a consultancy.

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The U.S. isn’t the only oil giant with declining production. Mexico, Norway, the North Sea, Nigeria and Angola have all seen production sag. Cash-strapped Venezuela is struggling to maintain output, while Libya is suffering the wholesale destruction of its once mighty oil infrastructure at the hands of ISIS. Hamm pulls out color photocopies of Libyan oil storage tanks exploding with billowing flames and black smoke. “Those are half-million barrel tanks getting blown up by ISIS. You can see the fires burning from space.” On the other side of the ledger are Kuwait, Iraq, Saudi Arabia and Russia, which are all producing at or near record levels. And Iran, of course, is now returning to the oil market in a big way. Hamm thinks growth out of Iran will be limited to about 300,000 bpd this year. “That’s old oil fields,” he says. Yes Iran has a lot of oil, but their state oil company hasn’t had the luxury of treating its major fields as carefully as the Saudis have managed its supergiants like Ghawar, which has been undergoing a carefully engineered water flood for decades.

At these low prices, just maintaining output will be a real challenge. “There’s a lot of confusion about supply and demand and how fast the oversupply will be diminished,” says Hamm. When companies stop investing in new drilling they have no choice but to face natural decline rates on the order of 6% a year. And that’s in conventional fields. Unconventional oil, like that fracked out of tight rock in the Bakken or Eagle Ford, will decline 15% or more. Worldwide, those natural declines erase about 5 million bpd of our 94 million bpd supply, every year. If investment dries up the supply simply won’t be there to meet future demand. WoodMackenzie, an energy consultancy, figures $380 billion in worldwide oil and gas capital spending has already been deferred — thus removing more than 3 million bpd of medium-term oil supply.

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