Sentiment is changing as Wall Street sniffs out a recovery in oil and gas. Indeed, the shift was evident in the evolution of questions investors asked oil and gas operators during first-quarter investor conferences.

When oil prices fell below $30 in February, the two most popular questions for C suite management in the conference parade of “one-on-ones” were: Why are you still drilling at these commodity prices? And, will you make it to the other side?

Fast-forward 45 days to late March, when oil prices recovered to $40. At the Scotia Howard Weil conference in New Orleans, the two most popular questions were: How quickly can you bring on rigs? And, at what commodity price will you add rigs?

The answer to the first question is theoretical as the services sector remains in rapid dissolution during the longest sustained downturn in the last four decades. But insight into the second question is available from surveys of oil service providers that Hart Energy conducts to track pricing, activity and changes in the market, publishing the results on its websites. During the first quarter, that survey effort incorporated questions on the commodity price necessary for oil and gas operators to increase activity.

Think of the process as crowdsourcing an industry viewpoint. The average of responses in all basins and across all service lines, including drilling, workover and well stimulation, was $50 WTI and $2.98 Henry Hub.

Empirical evidence adds credibility to contractors’ expectations about work volume and price. Last July, oilfield service providers reported that operators were inquiring about adding rigs. The rig count was moving up incrementally, after bottoming in June. Oil prices were above $60. Thirty days later, oil prices retreated in what turned out to be the leading edge of phase II of the current downturn. Operator demand for oil services soured immediately, as did contractor sentiment.

Last summer’s $60 price deck threshold predates additional reductions in service costs, generally down 35% to 40%, coupled with improvements in wellsite processes and incrementally greater hydrocarbon recovery. The main takeaway from the first-quarter Hart Energy surveys is that operators have lowered the threshold at which they will become active. That $10-per-barrel drop in price versus last summer is a substantial change in outlook.

Looking at the particulars, service providers expressed a range of threshold oil prices needed to increase activity. At the low end, Permian Basin workover providers cited $43; Permian Basin drillers came in at $48. Eagle Ford drilling contractors were not far behind at $46. Conversely, the threshold was highest in the Bakken Shale, where drilling contractors posted a consensus $55, while Bakken workover contractors expected demand to increase at $52.

The outlook for natural gas price thresholds was more uniform, with Marcellus contractors at $2.78 on the low end while service providers in the dry gas basins, including the Fayetteville, the Haynesville and the Barnett shales, ranged between $2.90 and $2.97.

A couple of caveats are worth noting, especially for an investment community that assumes the industry has an activity switch that can be flipped quickly. Commodity pricing must become less volatile, and it must reside at a higher threshold for a minimum of 90 days before operators develop the confidence to wade back into the market. In reality, six months is likely to elapse between a recovery in commodity prices and a significant uptick in activity levels.

As it stands now, the recovery is expected to unfold in two phases. The first is bringing drilled but uncompleted (DUC) wells online. Estimates on the number of DUCs in the U.S. range from 4,000 to 6,000. Both figures include a standard backlog of about 2,000 wells awaiting completion. There are roughly 100 well stimulation crews in the industry currently completing about 250 wells per week. The industry is expected to attack the DUC backlog first at a sustained commodity price regime in the mid-$40s. Afterward, operators will direct capex to expanding drilling activity at a sustained price threshold somewhere around $50.

Both events assume operator cash flow improves due to increased production and higher prices. Building that financial foundation will take upward of 180 days. Furthermore, operators are likely to ramp up at a slower pace than Wall Street anticipates, judging by conference presentations. Assuming commodity prices recover soon, an oil patch activity uptick remains a second-half 2017 event.

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