In the middle of the second-quarter conference call barrage, we managed to get analyst James K. Wicklund on the telephone—even though at one point, he spent 14 and a half hours straight listening to earnings calls when five of the oilfield service companies he covers reported on the same day.

Such effort is nothing new to Wicklund, an award-winning equity analyst for many years. Formerly with Carlson Capital LLC as a portfolio manager for the Dallas firm’s energy investments, today he’s managing director and senior oilfield service analyst at Credit Suisse.

Not just a numbers man, Wicklund spent several years working in geophysics and engineering in London, Singapore, Australia and the U.S. before joining the financial services side as a research analyst. He was formerly head of energy research at Rauscher Pierce Refsnes Inc. and later a managing director and head of energy research at Banc of America Securities Inc.

His awards include No. 1 rankings in Institutional Investor, Greenwich Surveys and The Wall Street Journal’s “Best on the Street.” He is a member of the Society of Petroleum Engineers, Society of Exploration Geophysicists and on the executive board of the National Ocean Industry Association and Dallas Petroleum Club.

Alarmingly, crude oil prices have declined at a faster clip since June than expected, as a brief rally back to about $60/bbl, which started to give a ray of hope to some E&Ps and service companies, apparently has fizzled. Any number of analysts and consultants are rapidly revising their outlooks.

Yet at press time the U.S. oil rig count actually rose by about 10 rigs, according to Baker Hughes. Given these conflicting signals of pain and hope, we turned to Wicklund for an update (he spoke at our Energy Capital Conference in April). Alas, what he thinks, and what he heard on those conference calls, isn’t pretty.

Investor: Jim, what is your takeaway from the latest quarter?

Wicklund: Oddly, the offshore companies did better than the onshore ones, but that’s only because the onshore ones have done so much worse. About midway through Q2, the oil price started to come back up and all the oil companies in May were talking about putting more rigs back to work—well, the oil price has taken that away. H&P [Helmerich & Payne] said on its call that it looks like its count will go down again. Nabors said dayrates in Q2 were in the low $20s but likely to head further south.

That expectation of momentum people started to have [is going away]. The U.S. is going to see the rig count bottom again, and now you’ve got a double-dip decline on the way in the second half, and deepwater is still challenged for the next couple of years—it hasn’t changed.

Before, you had rickets but now you’ve got AIDS, so rickets doesn’t look so bad!

Investor: Ouch! So what shape is the recovery likely to be in your view?

Wicklund: The V-shaped recovery that had been expected … is now a bathtub. Jeff Miller [Halliburton CEO] used that word at our conference a few months ago and we’ve used it in our research a number of times since. Tony [Petrello, Nabors Drilling CEO] invoked the bathtub too. It’s no fun. I’ve been the most negative oil service analyst out there for months and we’ve been saying it’s going to be uglier than you think.

Investor: We thought it was already ugly.

Wicklund: Keep in mind that we have idled over 650 rigs that were drilling horizontal wells in October of last year. Now, I’m not going to put more rigs back to work and in fact I might lay down even more. And later this year the rigs on contract will roll off of $26,000 dayrates and roll on to contracts at $19,000—assuming they even keep working. So the land guys will see their revenue decline all the way through 2016.

Most of the E&Ps say they’re going to keep 2016 spending flat with their 2015 exit rate, and the second half of 2015 will be down versus the first half—so you could see very few rigs go back to work in 2016. And yet I’ve still got 650 rigs waiting in the wings to come back to work at any amount above cash costs? If the rig count goes down, that will put even more pressure on dayrates.

Investor: What about the other services?

Wicklund: Each rig consumes about a third or a half of a pressure pumping spread—we think closer to a third. If we thought 100 rigs would come back to work by the end of this year, then that would be another 33 frack spreads coming back to work. Now they’re not. So after pressure pumping prices having stabilized in Q2, now they will be under pressure again.

Investor: How about the effect of all the drilled but uncompleted wells out there?

Wicklund: All these DUCs, where oil companies were waiting on higher prices in order to complete them—well, $45 is not “higher prices.” That’s putting additional pressure on these service companies. Ergo, we could wallow here close to the bottom throughout 2016.

Investor: What oil price deck are your analysts assuming here?

Wicklund: You look at the three-year strip [as of August 11] and it’s $52.55 per barrel. We’re at $57 to $60 for WTI, for three years.

Investor: When might that change?

Wicklund: U.S. production was expected to start falling in the second quarter and it was expected that since it was mostly unconventional production, it would drop like a stone—except that now, we have six years’ worth of unconventional wells producing on a flat curve. So it is not expected to drop in any meaningful way until you get well into 2016.

What’s more, E&P companies are high-grading their prospects instead of drilling in goat pasture, only drilling their best acreage in each play, and so they’re all talking about holding production flat or even growing it in 2016.

Investor: How has the whole equation changed?

Wicklund: We are now the swing producer in the world; a decline here has the effect of boosting oil prices. It’s interesting that always in my lifetime, oil prices have gone up to stimulate production, to get people to drill more. But now, oil prices have a different role.

Investor: What do you mean by that?

Wicklund: Taking into account the cost deflation of services, $75 oil now is equivalent to the cash flow E&Ps got at $92 last year, and last year at that price they grew production by 1.5 million barrels per day.

So oil prices won’t be $75. It’s a very different dynamic.

It used to be, “You tell me what the oil price is and I’ll tell you what the rig count is.” Now it’s changed: “You tell me what production growth the U.S. has to provide to balance global supply and demand, and I’ll tell you what the oil price is.”

If we grow production by a million five, oil will be $75. But if you need us to grow production by only a million a day, oil prices will be $70. If you only need us to grow production by 500,000 barrels a day, oil will be $65. Now depending on what Iran and Iraq do, and Chinese demand does … what the oil price is telling you is we don’t need U.S. oil production to grow any time soon. If the world does not need that, then oil prices will stay low.

It’s possible that U.S. oil production could decline and prices still wouldn’t move much.

But we have the volume potential nobody’s ever seen before. We’ve gone from permanently declining production of 5 million barrels a day, to being the equivalent of Saudi Arabia.

Investor: We haven’t talked about natural gas.

Wicklund: About 50% of the production of the top 35 E&Ps is still natural gas, although they’re working as fast as they can to switch to liquids. The legacy production is still to a large extent gas. But the three-year strip is $3.17. We’ve all talked about how $3 gas isn’t sustainable and we can’t meet supply and demand with that price. Well it turns out we’ve grown gas production on a fairly consistent basis at $3.

So if we have $3.17 for three years, why can’t we do the same with oil prices? Effectively capped. The only wells economic to drill are the ones that produce huge volumes. These Utica wells are putting the Haynesville to shame. These aren’t high pressure-gradient wells, they’re less expensive to drill, and look at the volumes. In Ohio!

Investor: And how will capital markets be responding?

Wicklund: The high yield markets have started to shut down for all but a few companies; the equity markets have gone away. We raised $8 billion in equity in the first half of the year for E&P companies at $70 to $80/bbl. We can’t do that at $45.

So if E&Ps have to spend within cash flow … that doesn’t bode well either. Schlumberger has made the point more than once that at some point, the E&Ps have to spend within cash flow. The banks aren’t going to lend them more money on depressed valuations. Now if somebody wants to sell stock at a depressed price, they can. They may have to, to survive.

Investor: Final thoughts on when U.S. oil production begins to roll over?

Wicklund: Credit Suisse believes that it will begin to decline in the current quarter [ended September], but at a very slow rate, start to accelerate into 2016, and become more visible as we go through 2016.

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