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$50 oil would start a recovery and increase drilling, says leading firms

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The oil industry has been shaving costs to stay competitive. Three large industry companies said $50 is the new magic number and will encourage more drilling, boosting the much-needed cash flow. As oil teeters close to $45 per barrel, the industry is ready for stability (or at least signs of it) with a goal of less than half of 2014’s average.

According to Wood Mackenzie Ltd., an average price of $53 per barrel means publicly traded companies will find relief from bleeding cash flow. Nabors, the world’s largest fleet of onshore drilling rigs, said plans to boost work are already in the works if prices rise “comfortably” above $50.

“It’s not just about touching $50,” said Fraser McKay, VP of corporate analysis at Wood Mackenzie in Houston. “It’s about touching, maintaining and having the perception of future prices above $50 a barrel before you start sanctioning projects that are economic at $50 a barrel.”

Globally, last year’s spending cuts were more than $100 billion while further cuts this year are expected in order to survive what Schlumberger Ltd. calls the industry’s worst-ever financial crisis. North America’s spending is expected to drop by half from last year.

Prices rebounded by two-thirds from a 12-year low, with trading above $45 a barrel Tuesday. This has explorers looking ahead to an eventual recovery as first-quarter earnings are released this week. Next year, BP plans to balance cash flow with shareholder payouts and capital spending at $50 – $55 a barrel, down from estimated $60. Pioneer expects to add horizontal drilling rigs when oil reaches $50, and the outlook for supply and demand is positive.

Every $5 climb above a baseline of $37 adds roughly $200 million in revenue, says COO Jack Stark of Continental Resources Inc. Adding more rigs are a probable outcome by the time prices reach $52. “We won’t chase price spikes,” Stark said. “We’re committed to being patient.”

Even talks or revamping are reminders of last year’s failed attempt to reactivate things too quickly as a result of rising prices. “We got out ahead of ourselves — bit of a head fake there,” said Tony Petrello, chief executive at Nabors. “We’re going to be a little more guarded here.”

Exactly when and how long it will take to get and stay at those levels are questions no one can surely answer. Nabor estimates activity could start up mid third quarter or the final three months of this year. Continental estimates supply and demand to near a balance later this year, being “absolutely in balance” or in need by next year. “The absolute timing may be off a bit,” Stark said, “but ultimately it’s going to happen.”

Article written by HEI contributor Marcela Abarca.

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