With tailwinds expected to outnumber headwinds, the forecast for the U.S. oilfield service (OFS) sector appears positive but risks remain, according to analysis from an independent energy market and investor relations intelligence firm.

“[Based on] all the meetings we’ve had over the last three weeks, we would suggest that you’re going to see another 75 rigs or so in the Permian over the next three or four quarters, which is about 30% improvement,” Sean Mitchell, partner for Daniel Energy Partners told attendees of Hart Energy’s DUG Permian Basin and Eagle Ford conference in mid-July. “We would actually take the over on that.”

Similar gains, he said, are expected in the Haynesville, where operators have enjoyed higher natural gas prices than seen in 2020. The rig count, a longtime staple in indicating future output, in other major basins was expected to remain flat.

The U.S. rig count is nearly double what is was a year ago. As of July 23, Baker Hughes Co. (BKR) data showed drillers in the U.S. had added seven rigs from the previous week, bringing the total to 491. The oil rig count stood at 387 that week with the Permian Basin leading the week’s gains, though Haynesville drillers dropped a rig. Updated numbers are due out July 30.

“Private E&Ps are showing an aggressive approach to securing rigs. … On the public side, they’re being disciplined,” Mitchell said. He later added, “While E&P capital discipline will likely persist, high commodity prices will translate into higher cash flows and higher spending. Therefore, we think by the middle of ‘22, you get to 600 rigs.”

The analysis was delivered amid improved oil prices and demand plus continued economic recovery with global GDP growth of 6.3% forecast this year. Also, fears associated with COVID-19 continue to fade, despite the presence of variants and rising coronavirus infections.

It all bodes well for energy demand and supply, but headwinds threaten to make business challenging for OFS companies. Topping Mitchell’s list was the capital discipline of E&Ps, specifically the public ones.

Delivering Efficiencies

Still, the firm believes overall E&P capex growth will rise about 10% to 15% year-on-year in 2022 as it continues to recover from the pandemic-induced slowdown, leading to higher rig counts. Privates could drive spending even higher, according to Mitchell.

“The private E&Ps are marching to their own drumbeat,” Mitchell said. “What does that really mean? It means they don’t have public shareholders to really hold their feet to the fire in terms of capital.”

With crude prices between $70 and $75/bbl and service costs low, “you’re going to drill wells,” he said. “We’re seeing that in the private rig count.”

The OFS sector has continued delivering on drilling and completion efficiencies and other technologies, saving time and money. It currently takes about 16 days to drill a well in the Permian Basin, compared to 27 days in 2014. The cost per lateral foot is also down to about $700/ft presently from more than $1,000/ft in 2018, Daniel Energy Partners’ data show.

Dual-fuel frac fleets along with simul-frac and slimhole drilling are strengthening shale operations, but Mitchell said “it feels like we’re getting into the later innings of efficiency gains.”

ConocoPhillips Co., for example, sees cost savings of about $200,000 per well and a 40% frac cycle time reduction with “zippering zippers” plus about a $100,000 per well cost savings with dual fuel and 20% noise and emissions reductions with e-frac fleets. Nearly all of ConocoPhillips’ completions will use either dual-fuel or e-frac technologies, according to Jack Harper, president of ConocoPhillips’ Permian Business Unit.

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Industrywide, Daniel Energy Partners also sees an uptick ahead in U.S. completion activity. The firm forecasts an estimated 230 U.S. frac crews by first-quarter 2022, up from about 182 in first-quarter 2021. In mid-July, the active frac crew count was about 215.

However, oilfield labor shortages due to better nonindustry opportunities, oversupplied equipment, OPEC+ moves and public-on-private E&P consolidation are among the risks.

“Completion activity will increase more slowly near-term but should accelerate in 2022,” he said in the presentation. “Companies, we believe, need to increase drilling first to replenish DUC inventories. Also, public companies need to stay within budget and completion costs make up a far greater portion of the total well cost.”

Growth, he added, will be constrained by the DUC shrinkage and E&P capital discipline—specifically from public companies. 

Watching Headwinds

“E&P capital discipline within the public companies persists and it’s real,” he said. “When you take capital away from a group where Wall Street was providing capital, it becomes a forced discipline. You just don’t have the money to spend.”

Public companies have vowed to keep spending in check, focusing on paying down debt, increasing dividends and returning money to shareholders. Despite higher oil prices, many are staying disciplined—perhaps falling back into the favor of some potential investors. Many are putting way less back into shale plays than they used to do.

Oklahoma City-based Devon Energy Corp. plans to reinvest about 45% of its operational cash flow, down from about 60%, Mitche said citing The Wall Street Journal. Devon isn’t alone.

Rystad Energy data show U.S. tight oil maintained a 55% reinvestment rate in fourth-quarter 2020, underspending nearly $3 billion comparing capex to cash from operations.

In 2014, the reinvestment rate in the Permian Basin was just shy of 300%. By 2020, it was less than 90%.

RELATED: US Shale Reinvestment Rate Falls

As for OFS capital spending, it’s still depressed.

“We submit the companies continue to underspend relative to the activity rebound,” Mitchell said in his presentation. “Consider the BKR rig count is double vis-à-vis the trough and the frac crew count is more than triple the trough, yet capital spending is essentially flat y/y in 2021. Simplistically, this tells us the industry continues to cannibalize.”

He called it unsustainable. The firm sees service costs rising by 15%-20% by the end of second-quarter 2022, compared to a year earlier, as consolidation among OFS companies arises.

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