
Second-half 2015. Second-half 2015. Second-half 2015. For months now that’s all we’ve heard from one end of the oil patch to the other: Oil and gas prices should improve in second-half 2015. U.S. oil production will begin to roll over in second-half 2015.
Well, halftime is here—and the game’s momentum just may have shifted. Last month people started to say that we’ve seen the bottom, but we don’t know how long this will last. At press time (during the height of first-quarter earnings season), WTI crude rose above $60/bbl, finally—then fell back again.
“The worst of the recent crisis is now over, while we continue to expect a better resolution would materialize only after September 2015, in our view,” declared Global Hunter Securities on May 6.
At the same time, Roth Capital Partners analyst John White noted three signposts: In early May, Cushing’s oil inventory declined for the first time in 21 weeks; since mid-March there’s been a slight decrease in U.S. production; and since October the oil rig count has dropped 58%.
But how long can oil remain around $60, never mind recover beyond that, when many E&Ps unveiled significant increases in oil production in the first quarter—and predict an overall increase for the remainder of the year? Occidental Petroleum’s Permian production rose 46% year-over-year. Continental Resources said its oil output rose 36% in the quarter—and it set a company record for drilling a two-mile Bakken Shale lateral in just three days.
Cimarex Energy Co. said its Permian production peaked in the second quarter and its Midcontinent output will pick up in the third. It also noted that fracture stimulation costs are down by an average 20%, despite the fact that it’s been using 12% more fluids and 20% more sand per frack job.
Although many individual E&Ps continue to create production growth, the overall rate of U.S. oil growth is slowing, however. The EIA recently projected steeper decline rates from legacy oil production in the major shale plays in May 2015 compared to May 2014.
If all drilling ceased for two or three months, it would be interesting to see by how much and how fast U.S. oil and gas production would fall. We’d soon know about the true shape of the collective shale decline rates and get a better handle on how much drilling is actually needed to keep the treadmill going.
Meanwhile, many E&Ps also reported better margins in the quarter despite low commodity prices, since service costs are down across-the-board from 10% to 20%.
We certainly applaud the new efficiencies spreading across the oil patch like so many jumbo fracks. At the IPAA OGIS conference in New York recently, Ultra Petroleum CEO Mike Watford took efficiency to new heights, saying he no longer measures reaching total depth in drilling days, but in hours! He cited a well in Jonah Field in the Powder River Basin that took 197 hours—that’s eight days and a lunch hour.
With progress like this, operators may conclude that there is no need to put 1,000 rigs back to work again for quite some time.
Some oilfield service companies see the handwriting on the wall and have begun talking of a new business model based on fees for production gains, not for service rendered. But as Credit Suisse analyst Jim Wicklund told me recently, that transition could take a couple of years—and investors won’t wait that long for the service upturn. After spending the day at OTC, Wicklund said the mood was subdued. Although investors he talks to seem to think the recovery is nigh, the oilfield service guys he spoke with are not as optimistic. Wicklund cracked that when oil prices are soaring, investors will believe everything they hear, even from the shoeshine boy; when oil prices and stocks are cratering, they don’t want to listen to him or anyone.
Raymond James sounded a note of caution too, after Pioneer Natural Resources said it would add back two rigs per month in the Permian Basin starting in July—if the oil outlook remains positive. “E&P commentary is confirming suspicions of an activity pickup in 2H15,” a Raymond James research note said. “The rest of the industry will be watching the market’s reaction closely as others have hinted at rig increases later in the year, but Pioneer is the first to lay out a timeline and magnitude of a potential rig count increase.
“Additionally, Pioneer is now guiding that … it is currently expected to result in heavier production in the second half of the year. This confirms our activity assumptions that the rig count could bottom in June, as E&Ps begin to step out and look to ramp activity back up in the back half of this year.”
So all in, we are not out of the woods yet—but we can see daylight ahead through the thinning branches.
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