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North America E&Ps to focus on capital discipline

New York — Having worked to improve drilling and completions, as well as right-size assetportfolios, North American exploration and production companies are expectedto enter 2018 focused on delivering rewards to shareholders.

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As E&P companies prepare to release their fourth-quarter and full-year 2017earnings results, many industry players are expected to post only moderateproduction growth in the first half of this year, Gabriele Sorbara, seniorequity analyst at the Williams Capital Group, said.

Many producers who achieved remarkable capital efficiencies in recent monthsthrough the use of advanced technologies -- such as drilling longer lateralsand increasing proppant volumes during fracking operations -- in 2018 willdial back on practices that increase costs for testing and completion, hesaid.

"You'll see companies planning on the use of completion designs that work in a$50[/b] to $55 oil world," Sorbara said.

In recent statements, executives with a number of producers, including Encana,Chesapeake Energy and Gulfport Energy, stressed that along with increasing oiland gas production, their focus would be on capital discipline and increasingreturns to investors.

"We have established a powerful track record of meeting and beating ourtargets, continuously driving efficiency and capital discipline," EnCana CEODoug Suttles said in a January 9 statement updating the producer's 2017results.

Chesapeake Energy CEO Doug Lawler said the Oklahoma City-based producercontinues "to improve our capital efficiency and cost structure as we drivetoward free cash flow neutrality."

Gulfport in 2018 expects to generate about 30% production growth year on yearfrom its assets in the Utica Shale play and the SCOOP oil play in Oklahoma,while maintaining a disciplined capital program, CEO Michael G. Moore said inthe company's Q3 release.

GROWTH FOR ITS OWN SAKE NO LONGER IN VOGUE

The producer would "remain focused on cash flow neutrality for the 2018calendar year, aligning drilling and completion capital to operational cashflow," Moore said.

Several equity analysts agreed that producers in 2018 would largely try toavoid production growth for its own sake.

Gordon Douthat, senior analyst with Wells Fargo, said the renewed focus oncapital discipline, along with stronger crude oil prices and reasonablevaluations, would help many producers to prosper in 2018.

"Many operators, led by Anadarko Petroleum (APC), have already begun to takeaction to return cash to shareholders, sell non-core assets to shore upbalance sheets, or announce growth programs that are limited to internallygenerated cash flows," he wrote in a recent note to investors.

"We see the potential for US E&Ps to rally another 15%-20% into 2Q as thegroup discounts less downside risk to oil prices,? Morgan Stanley analystssaid in a January 16 note. "We expect the vast majority of E&Ps to deliver onpromises of greater capital discipline in 2018. This moderated increase indrilling activity relative to the increase in oil prices should limit costinflation."

All this is not to say that no operators are likely to see production growthin Q4. A number of gas producers in the Marcellus and Utica shales of theAppalachian Basin can be expected to report continued output growth in thequarter.

For example, Appalachian producer Cabot Oil and Gas said it expected to reportnet gas production of 1.78 Bcf/d to 1.85 Bcf/d in the quarter compared with1.75 Bcf/d in Q3 2017. The company?s Q4 production guidance would likely havebeen higher, except that it reflects the divestiture of some of its WestVirginia properties, which closed in the third quarter.

Meanwhile, producers who are active in rapidly expanding oil-producing plays,such as the Permian Basin of West Texas and southeastern New Mexico, areexpected to continue to post impressive production results from those plays.Gas production from these plays largely will be associated with oil.

Oklahoma City-based Devon Energy is expected to see increased oil and gasproduction in Q4 2017 from the STACK, where in the third quarter it drilled 14new Meramec formation wells that achieved average 30-day rates of greater than2,300 boe/d, with 55% of the output comprising oil.

In the same quarter Devon said it drilled four new Bone Spring formation wellsaround the state-line area of southeast New Mexico that attained 30-day ratesof 1,750 boe/d (75% oil).

--Starr Spencer, starr.spencer@spglobal.com