Oil Will Recover Once Producers Quit Spending Money, Hamm Says

Oil Will Recover Once Producers Quit Spending Money, Hamm Says

(Bloomberg) — Oil prices will recover as early as the first half of this year as producers cut back, Continental Resources Inc. founder and CEO Harold Hamm said Wednesday.

Hamm said Continental, the largest leaseholder and producer in the Bakken shale play of North Dakota and Montana, can weather low crude prices “forever” as it idles wells. He expects other drillers to cut spending by 50 to 75 percent, in line with Continental’s announced reductions.

“A lot of people think, well, if you start drilling, you’ve got about a six-month process before you can slow down,” Hamm said in an interview at the Argus Americas Crude Summit in Houston. “Wrong. Because after all, you drill that well, it takes about a month to drill it, or 25 days. You don’t have to complete it.”

Spending at Oklahoma City-based Continental will fall by 41 percent to $2.7 billion in 2015 and production will increase by as much as 20 percent this year, down from 29 percent, the company said Dec. 22. It will average about 31 rigs in 2015, down from 50, and will drill an estimated 188 wells in the Bakken formation and about 81 wells in the south-central Oklahoma formation.

“What you do, you go into cash conservation mode quickly,” Hamm said. “Basically, you quit spending money.”

The number of wells awaiting completion in North Dakota rose to 775 in November from 585 in June, according to state data.

Sixty percent of the cost, on average, is from once the rig leaves the location, Hamm said. “Why spend that money today to bring on production that’s going to be sold in a bad market? You don’t need to do that.”

West Texas Intermediate for March delivery fell $1.78, or 3.9 percent, to $44.45 a barrel on the New York Mercantile Exchange, the lowest settlement since March 11, 2009.

 

Completion Costs

Well completion costs should come down in the future, Hamm said, adding that if a producer can save 5 percent of those costs, it can wait a year to go forward. If more producers take that approach, the biggest drop in oil prices in five years will quickly be a memory, he said.

“Analysts will be able to see this supply going away within the first half and say, ’Woo, that projection was wrong. These prices are way too low. Supply is not going to be replaced at these prices, so it’s gonna have to come back up,’” Hamm said.

 

No Cuts

Hamm cited the company’s ability to make money from its current output at $45 a barrel oil, its low debt-to-equity ratio and a healthy credit line as allowing it to weather the price drop. Continental doesn’t plan to cut staff in the Bakken this year. Instead, the company is planning to increase training during the downturn to prepare for the rebound.

“Gosh, we went through 2008 and the rig count went to 39 in North Dakota,” Hamm said. “It went from 80 some rigs down to about half that. At that time, there wasn’t no bust up there. There was a slowdown felt. It helped everybody catch their breath.”

Hamm’s wealth, which is tied closely to the shares of Continental, has rebounded after falling by $5.7 billion last through through late December. It has grown by $721.5 million so far this year and stands at $11.3 billion, according to the Bloomberg Billionaires Index.

Hamm, 69, said he has had succession talks with Continental’s board. He said “someday” he’ll want to take a less active role in the company. He plans to stick around as long as he’s still having fun in his job.

“I have a whole bunch of colts in the corral that would be biting at the bit to do all this themselves,” Hamm said. “They don’t need me, really. I could go away and play and they would run it just fine, when the time comes. It hasn’t yet.”

The “primary” driver behind the recent agreement to sell his Hiland Partners pipeline business to Kinder Morgan Inc. for $3 billion, including debt, was the timing and Kinder’s persistence, not the need to free up cash after his $975 million divorce settlement, though he acknowledged “there was money exposed there, of course.”

Hamm said his focus has remained on the business, as his lawyers deal with the personal matters. “Good or bad, all’s well that ends.”

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