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A drilling crew member raises a drill pipe onto the rig floor on an oil rig in the Permian Basin near Wink, Texas. Concho’s woes bode ill for the rest of the sector. Image Credit: Reuters

Houston

One of the largest oil drillers in America’s most prolific shale field is being forced to slow down, casting a dark cloud over an industry already struggling to win back investors.

Concho Resources Inc, which Evercore ISI calls the bellwether of shale, plunged on Thursday after scaling back production targets for the rest of this year. The 23 wells that make up Concho’s “Dominator” project in the Permian Basin were spaced too closely, and production will have to slow to avoid overshooting budgets.

The announcement came as rival explorers Apache Corp and Whiting Petroleum Corp also lowered growth expectations. Whiting slashed one third of its workforce and posted a surprise loss.

23

Number of wells that make up Concho’s ‘Dominator’ project

It’s the latest sign that companies in the vanguard of the US shale boom face fundamental issues with their business model. With shale-well output falling off by as much as 70 per cent in the first year, drillers need to pedal faster and faster just to maintain output. Concho’s owes bode ill for the rest of the sector, Evercore analyst Stephen Richardson said in a note to clients Thursday.

“There is little doubt this is a big event for the sector and a brake of this nature will create lasting impact,” Richardson wrote.

Concho sank 22 per cent to close at $75.97 for its biggest one-day drop since 2008, wiping out almost $4.4 billion of market value. Whiting fell 39 per cent.

“How companies still, after all these years we have wailed and gnashed our teeth, manage to over-promise and under-deliver, remains an infuriating mystery,” Mizuho Securities USA LLC analyst Paul Sankey said in a note to clients. “Do we really need to repeat, that a company, much least in the most hated sector of the market, with a premium valuation, must never, ever, over-promise and under-deliver?”

Disappointing updates from shale producers, along with a crude collapse spurred by a midday tweet from US President Donald Trump threatening China with more tariffs, dragged down the stocks of other Permian explorers on Thursday. Oil futures plunged 7.9 per cent in New York, the most in more than four years.

Diamondback Energy Inc and EOG Resources Inc fell more than 5 per cent. But EOG later reported second-quarter production that exceeded its expectations, while generating $2.1 billion in free cash flow. Exxon Mobil Corp and Chevron Corp are scheduled to report earnings before markets open on Friday.

$2.1b

Amount generated by EOG Resources in free cash flow

Concho didn’t alter its target for almost $1 billion in free cash flow next year but analysts’ scepticism over whether that was still achievable was palpable. Morgan Stanley’s Devin McDermott called the target “optimistic,” and several questions on Thursday’s conference call sought clarity on cash flow forecasts.

Parent-Child Issues

Concho’s problem with well spacing highlights the challenges of fracking so-called child wells: Too close to the “parent,” and output is less prolific; too far apart, and companies risk leaving oil in the ground.

Spacing issues aren’t always obvious from the get-go. Concho said results in the initial 30 to 60 days of the Dominator wells were fine. It was after that that executives realised they had a problem.

Then there’s natural gas. Futures are trading at the lowest seasonal levels in two decades, and prices in the Permian Basin have gone negative thanks to a lack of pipeline capacity. For Apache, which is pouring investment into its gas-rich Alpine High discovery, that means deferring production.

Concho lowered its full-year gas price realisation to between 60 per cent and 80 per cent of the US benchmark, with prices in the current quarter expected to be toward the low end of that range.