Fitch: 2014 Full cycle costs drop for North American E&Ps

Median full-cycle production costs declined across a sample of 28 North American E&P companies in 2014, driven by lower production expenses, lower finding, development and acquisition (FD&A) costs, and beneficial mix effects as many producers reoriented their portfolios towards oil at the expense of natural gas, according to a new Fitch Ratings report.

As calculated by Fitch, the oil and gas prices required by the median North American producer to meet its full cycle revenue requirement declined to an implied oil price of just $66.30/barrel (bbl) and implied gas price of $2.97/thousand cubic feet (mcf) in 2014, versus $71.75/bbl and $3.22/mcf in 2013. These are declines of about 7.6% yoy and 2.0% per year since 2008, respectively.

Lower FD&A costs were the biggest driver of price declines for North American producers. While many independent E&Ps expanded operations in core shale plays, one-time infrastructure expenses and negative reserve revisions from previous years also rolled off, helping to lower FD&A averages.

E&Ps also benefited from favorable mix effect as producers continued to transition to higher-priced oil from natural gas. The median producer's liquids production increased to 55% from 52%, with some of the biggest yoy changes in liquids production included Devon Energy Corp. (+10.1%), Range Resources Corp. (+9.5%), Linn Energy, LLC (+6.6%), EOG Resources (+6.1%) and Apache Corp.(5.5%).
Looking forward, Fitch expects that North American cash costs are likely to decline in 2015 as the impact of drilling and service costs kick in. While drilling costs are lower, FD&A may be higher due to the impact of negative, price-based reserve revisions associated with sharply lower 2015 oil prices, which may result in reserve debookings if prices stay low.