A Marker To Compare Future Declines
This week’s rig count produced a false positive, essentially reporting the activity level in effect shortly before oil markets cratered from the OPEC + dissolution and the ensuing draconian retrenchment in E&P 2020 capex.
In all, rig count was up six units for the week in all tight formation plays, led by a five-unit gain in the Permian Basin. Remember that number. The industry is now facing an onrushing whirlwind. Initial announcements on domestic capital spending reductions range from 30% to 50%, depending on the operator. The tally of rigs released, or soon to be released, is approaching several dozen and will climb further. If a rig is on a well-to-well contract, or short term package of wells, that rig is destined to lay down as soon as those commitments are met. The assumption is that most surviving rig activity will be allocated to longer term contracts. The news is even worse for frac crews who are also being let go.
Efforts to reduce DUCs in 2019 will see the volume of drilled but uncompleted wells start rising between now and the end of the 2nd quarter 2020.
There are some who wonder whether the oil field service sector will step up to help E&Ps survive the transition to sub-$40 oil. The fact is that the oil service sector has been doing that for well over a year. Many service firms are operating at cash cost, or less. You’ve heard the perennial dark humor comment in oil services: "yeah, we’re losing money on every job, but we hope to make it up on volume.” It takes gallows humor to get through a rapidly deteriorating market. There won’t be much quarter provided to E&Ps from a deeply wounded service sector.
Meanwhile, E&Ps will have their own worry as companies confront a wall of debt with little opportunity to refinance. The oil-based E&Ps are going to join the gas-based E&Ps by transitioning from capital spending reductions at a level that still allowed for production volume growth, to maintenance operation levels and reductions in production volume.
U.S. oil production is projected to roll over, and may fall as much as 4 million bbls/d before the bloodletting stops. This has become the year to beware the Ides of March. Caesar-like, the U.S. E&P sector has looked at the Saudis and asked: Et tu, Brute? You don’t need Latin to understand the answer.