Will Iran Derail U.S. Energy Production?

Will Iran Derail U.S. Energy Production?

A decade-long standoff between the United Nations and Iran over that country's nuclear ambitions and capabilities may be coming to an end. If it does, Iran's oil exports will resume and, in time, grow to an estimated 1.3 million barrels a day. Add growing exports from Iraq and possibly Libya and there may be significant price pressures on the world oil market. Will oil prices drop to the point of making U.S. oil production prohibitively expensive? I doubt it. Here are three U.S. oil companies driving down their production costs to stay competitive in the oil business.

Biggest in the Bakken
The Bakken oil play gives the U.S. almost 1 million barrels of oil a day. Continental Resources holds more real estate and produces more oil in the Bakken than anyone else. Drilling costs in the Bakken run as much as $10 million per well. Continental recently announced its drilling costs declined to $8 million, and it reached this milestone three months ahead of schedule. The company projects future costs to drop to $7.5 million per well. More wells per pad and more tightly packed horizontal wells drive this cost reduction.

Continental also operates in Southern Oklahoma where its drilling costs run between $9 to 13 million per well. The company sounds upbeat about both the production potential of the play (70 billion barrels) and cost-reduction potential. Continental increased Oklahoma oil production by 293% from the prior year and plans to apply lessons learned in the Bakken to this play.

Multiwell pads pay off in a couple of ways. Lower costs mean higher profits. That's easy to figure out. The increased wells per pad and other efforts also mean greater proven reserves and increased recoverable reserves. In fact, Continental estimates its recoverable oil reserves grew 57% from 2010 to 2012. The company anticipates further improvements in recoverable oil in 2014.

Turning around by turning to oil and liquids
Chesapeake Energy used to be a company I loved to hate. With the departure of CEO Aubrey McClendon and renewed focus on profitability, it's a company to love. The turnaround comes, in part, from a shift from natural gas to oil and natural gas liquids production. While that improves revenue, Chesapeake hasn't ignored cost savings either.

For starters, the company reduced its exploration and production staff by 20%. Like Continental, Chesapeake used multi-well pads as one way to decrease its drilling expenses on established pads. The efforts paid off. Production and administrative expenses declined from $1.40/million cubic feet equivalent in the first quarter of 2012 to $1.05/million cubic feet equivalent in the third quarter of 2013.

Looking ahead, expect more of the same. Chesapeake makes clear its intentions to continue shifting its production balance toward oil and natural gas liquids. Improving operating efficiencies and reducing drilling costs remain a priority. These efforts, combined with more conservative capital expenditures, should help Chesapeake deliver profits for its investors.

Cranking out the oil and profits
Fellow Fool Matt DiLallo once described EOG Resources as a company that "is printing money." That's no hyperbole. With assets in the Bakken, Permian Basin, and particularly the Eagle Ford, EOG reports impressive returns on its drilling activities. Like Continental, cost reductions play a role in its success.

In its Eagle Ford play, EOG spent $9.1 million in 2009 for each completed well. Today, it spends $5.8 million. The company's goal: $5.5 million. This cost reduction came from a combination of improved well-completion techniques and reduced drilling days. Self-sourcing its own fracking sand adds more cost savings. Add EOG's owned railroad assets and it's hardly surprising EOG's production expenses declined over the years.

Marketing its oil by its own crude-by-rail assets contributes to its financials in another important way. The company ships oil directly to St. James, La. where EOG receives roughly $8/barrel more for its oil, particularly its oil from the Bakken. The company also ships oil to Cushing, Texas but doesn't command the same price there as in Louisiana.

Look over the investor presentation from December, and you see a company firing on all cylinders: reserves climbing, costs declining, earnings and dividends increasing, oil production growing.

Final Foolish thoughts
Theoretically, the Middle East could produce enough oil that the resulting price drop forces U.S. companies to stop producing oil. For that to happen, the Middle East will need political stability and cooperation.

Middle Eastern oil-producing countries have been distrustful of each other for decades. I doubt any of that will change soon. For investors, this means continued U.S. oil production and profits therein. Even better, as the cost of production declines, those oil profits should climb regardless of Iranian oil exports.

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The article Will Iran Derail U.S. Energy Production? originally appeared on Fool.com.

Robert Zimmerman has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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