Need a Forecast? Look for a 51% Rig Decline over 43 Weeks

A look at rig activity retrenchments in prior commodity price events finds the average at a 51% drop. The smallest percentage decline was 43% in 2001, followed by a 46% reduction in 1991. The largest decline was the 57% reduction in rig activity post-2008, followed by 56% in the first leg down post-Thanksgiving 2014. That initial decline was followed again by a further 54% reduction post-2016. Granted, some of the latter represents the transformational move to pad drilling and technical improvements such as longer laterals that created less demand for rigs when the industry recovered in 2017.

E&Ps who previously announced an initial round of capital spending cuts are now coming out with Round Two less than 21 days later. On average, and this includes the integrated companies, the current projection is for a 30% reduction in 2020 capital spending. But, eliminating the large budget international firms gives a better picture of the developing situation in the land drilling sector. Capex reductions range from 35% to over 50%. That’s just among those who have announced spending reduction. Right now, let’s call it a 40% drop.

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And that reduction in capital spending is before acknowledging the $86 billion dollar debt load North American independents face within the next four years, along with the $36 billion debt load on behalf of service companies due within the same time frame.

What does the past tell us about the current cycle? Let’s stick with the historical average decline for now. Applying that average to recent drilling activity implies a U.S. bottom around 394 rigs in aggregate and about 370 rigs drilling in the tight formation plays encapsulated in Hart’s Unconventional Activity Tracker. Extrapolating those numbers to the fracture stimulation sector suggests spread count is headed towards sub-130 units nationally versus about 275 units at the most recent peak. Halliburton is laying off 3,500 in this first tranche while smaller firms have announced layoffs ranging from three to six dozen employees.

We won’t sugarcoat it for you. Domestic drilling activity is recessionary below $45 WTI. It is dysfunctional below $33, and unsustainable below $25. Should the current price collapse last more than 90 days (let’s call it below $35 WTI for 90 days), we will all be spending time revisiting the quarterly graphs at HaynesBoone.com, which chronicled the march of insolvency through the energy sector after 2014.

There are letters going out from E&Ps requesting oil service firms implement a 25% cut in pricing. That strategy guarantees insolvency for many oil field service firms. Those letters to date have said nothing about cancelling plans to buy back stock, which should be the first consideration in the current environment. At this point, the industry cannot attract Wall Street capital/consideration even by attempting to buy it from investors.

It is still early for addressing whether the recovery alphabet is V-shaped, U-shaped, or the extended small “w” shape of cyclicality that everyone expected after 2016. Those projections always start with the letter V. You know the drill: production rolls over, commodity price spikes and it’s all unicorns and rainbows. That won’t happen until the world removes 10 million to 12 million barrels per day of oversupply, something not likely until 2022, or longer, depending on the course of COVID-19 and how quickly U.S. exports go to zero.

Board up the windows, head over to Lowes to hoard survival gear, hunker down and stay healthy. You can bet E&Ps will be maintaining social distance from their vendors. In oil and gas, our thoughts and prayers at this time are with the oilfield service companies.

—Richard Mason

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Hart Energy’s exclusive rig counts measure drilling intensity. Our counts exclude units classified as rigging up or rigging down, and also exclude rigs drilling injection wells, disposal wells or geothermal wells. The result is our most accurate assessment of rigs on location working on oil or gas programs as of the sample date. While our process results in a rig tally that is lower than the published numbers from the non-proprietary rig-tracking agencies, Hart Energy believes our product presents the most accurate picture of what is actually occurring in the field.

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