When it comes to recoveries, we’re long past the letters V and U, as noted in this month’s cover story. It’s still a debate whether we will witness a bathtub-shaped recovery with the lower section measured in years. So how about a lower case “w” for the future of oil and gas field activity? The letter depicts a sce¬nario where pricing improves, operators put rigs to work, supply responds, commodity prices pull back and operators do the same. Rinse and repeat.

There is historic evidence that lower case “w” regimes can be long-lived. Witness the lower case “w” undulation that followed the invasion of Kuwait in the 1990s. The trend lasted seven years. It’s telling that the cur¬rent downturn has now exceeded all other downturns in duration since 1986, with the sole exception of those mildly fluctuating years in the 1990s. The lower case “w” appears to be the predominant pattern for markets in chronic oversupply.

Today, crude production declines are encouraging, although inventories remain within eyesight of record highs. Expansion in field activity, coupled with efficiency gains, may yet aggravate bloated storage and serve as a governor of commodity price.

That’s not to say there isn’t opportunity in a lower case “w” scenario. For one, oil and gas was a predictable industry in the 1990s. Investors could buy oilfield service stocks early in the year and see apprecia¬tion through May. Activity worked toward an autumnal peak and retreated—along with equity valuations. The annual pattern worked until the nation ran short on natu¬ral gas. A series of ever-rising peaks fol¬lowed in the land market with high points in 1997, 2001 and 2008 as the nation rolled from the offshore Gulf to U.S. conventional land to tight formation sands after 2001 and, eventually, to unconventionals.

Back then it was easy to recognize recovery. Private operators—checkbook operators, as one oil services CEO charac¬terized the sector—were first to return. The term checkbook simply meant that when commodity prices rose, bank accounts for privately held firms expanded and that money made its way back into the field.

Ultimately, the voracious capital require¬ments of unconventional resource devel¬opment ushered in a new era. Operators needed trainloads of capital to acquire immense tracts of land, or to outspend cash flow to get on the developmental treadmill after 2008. Horizontal drilling by public operators—with access to capital—became the major activity.

That narrative winds back to the cur¬rent recovery, such as it is. The consensus argues that the future will look just like now, with greater wellsite intensity involv¬ing longer laterals, more stages, exponen¬tial increases in proppant loading and a scramble for stacked-pay acreage in the Permian and Anadarko basins.

Within the recovery lie clues to how this consensus scenario is playing out. It turns out the initial phases were not all that dif¬ferent from past recoveries, when things were simpler. Private operators accounted for almost 70% of rigs added during the first 90 days of the recent recovery, especially in the Permian Basin, the non-Eagle Ford Gulf Coast and the Mid¬continent. And 45% of those rigs were non-AC-VFD Tier I units.

Since then, the recovery has begun exhibiting the characteristics outlined in the general consensus scenario: big publicly held companies adding high-spec equipment in the Permian and the Midcontinent.

But at the end of the day, the sector that is most agile in its response to changing oil and gas prices is privately held firms, which are quick into the market when com¬modity prices rise and exit quickly when price signals go the other way. Public com¬panies react more slowly at both ends of the cycle but add significant momentum once they do. And while private E&Ps are holding their own on rig count, the recent retreat in oil prices, should it be sustained, will provide insight into whether this recovery develops legs. Keep an eye on the private operators.

Observers shouldn’t overlook diversity in a healthy oil and gas market, even in a lower case “w” scenario. Higher com¬modity prices offer incentive for multiple industry solutions, whether from private or public companies. A healthy market for one should translate into a healthy market for all in a full-fledged recovery.

After nearly two years adrift in the dol¬drums, the industry awaits the rising tide that will lift all boats. Pundits and partic¬ipants are looking for those early signs, including whether it will morph into lower case “w” undulations.

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