We used to say that trying to catch a break during this downturn was like trying to catch a falling knife. Now we need to update that—apparently it’s more like trying to catch a Pokémon when you are at the mall or on the golf course.
However you choose to play it, a tentative recovery appears to be underway, although attendees at Summer NAPE complained it is coming much too slowly. Some were still floundering; others are making money in their own little niche. Cash management is one key to survival, and the other is what I call DUC (drilled-but-uncompleted wells) management.
First, cash deployment affects rig counts, and the U.S. count at press time was knock¬ing on the door of 500, up from May’s low point of 404. However, even if the 500 threshold is reached this year, that number would still be down by about a third year-to-date—but let’s not quibble when progress is finally being made. What do these rig num¬bers really mean?
“We estimate 600 to 650 rigs would be required in the U.S. to halt the produc¬tion decline trajectory and restart growth in 2017,” said the Baird Energy research team in a note. The last time the count was that high was in January. This is a startling factoid—that 600 or 650 rigs could cre¬ate domestic oil production growth, when growth was last achieved when 2,000 rigs were working. It’s the biggest and most impressive testament to the industry’s adapta¬tion to what OPEC wrought, and those tech¬nical gains are spreading to more and more companies in every play.
Baird said it thinks the rig count rise will continue to be choppy and range between 500 and 700 for the foreseeable future. On its second-quarter conference call, Halliburton Co. said 900 rigs is the new 2,000.
More important, the battle between the decline curve and the type curve will become more intense, and bears watching at both the corporate and national level. The Energy Information Administration reported that production from new wells drilled just since 2014 made up 48% of total crude pro¬duction in 2015 (and 51% was from tight oil formations—the Bakken, Eagle Ford and Permian Basin). If this holds true and we see rig counts continue to lag in each of those areas, decline curves start to pose serious questions.
Can the impressive efficiencies gained during the past three years offset this year’s lower rig counts to the extent needed to keep U.S. production flat? Already, North Dakota authorities report Bakken pro¬duction will dip below 1 MMbbl/day by year-end, to a two-year low. No drilling, no more production.
A modest rise in the price of oil, com¬bined with better results per fewer wells completed, is going to limit the speed or amount of any rig count increase that we might otherwise think is needed. Wells Fargo Securities senior analyst David Tam¬eron has asked, why would companies put rigs back to work if crude oil still settles below $50?
At EnerCom’s 21st annual The Oil & Gas Conference in Denver in August, we got some answers. We learned that even smaller E&Ps can drill ever longer horizontal lat¬erals. We learned that white sand is better than brown for most fracture stimulations. DUC management may have a big influence on 2017 results, according to speakers on second-quarter conference calls and at these investor events. Bill Barrett Corp. said it will hold production flat through December, but prepare some DUCs that can be com¬pleted in 2017.
For another example, consider Advan¬tage Oil & Gas Ltd., a Calgary intermediate focused on three benches of the gas-rich Montney Shale in Alberta. “We’ll be drilling some wells this year in the Montney but we won’t complete them until the end of 2017. We want some DUCs, but not a big backlog of them,” said CEO Andy Mah. Speaking at EnerCom, he said this decision comes even though the Toronto and New York-traded E&P reported cash flow was up 34% in the second quarter while production rose 68%.
Over and over, presenters claimed that this bolt-on deal or that financing has set them up for future success. MidCon Energy Partners LP cited its convertible preferred unit sale to add assets in the Permian, pay debt and operate within cash flow. Samson Oil & Gas Ltd. CEO Terry Barr said, “In summary, we have survived.” The company is focused on hiking production via 32 workovers, and it sold some Bakken assets to pay debt and live to drill again.
What else have we learned? Simmons & Co., a Piper Jaffray company, said in a recent report that some service companies are hiring again. Many companies have hiked production guidance based on the number of wells to be completed through year-end, without increasing their budgets. The most important claim we hear is that at least half of the new cost reductions and efficiencies are sustainable. That’s music to our ears.
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