FEAR of DUC wells - Feb 8

[dan_s]

Raymond James published a new report on the concerns some investors have that the upstream companies will complete a lot more drilled buy uncompleted wells (DUC's) now that the oil price has rebounded. Like most FEARs it won't have a big negative impact on supply & demand balance. Send me an email if you'd like to read the full report. Below are the first and last paragraph.

"For those unfamiliar with the basics of tight oil production, wells are first drilled horizontally across the shale formation and are then "completed"
by a frac crew which pumps water, proppant, sand, and other materials to fracture and stimulate the rock formation so that oil can flow. As such,
a Drilled but Uncompleted Well (DUC) represents the work in process inventory (to use an accounting term) of an E&P. Given that the pandemic
led to a historic drop in demand for the finished product (oil), operators are sitting on a tremendous WIP inventory of DUCs that they only began
to get worked down in 2H20. While the DUC draw seen in 4Q20 was the largest ever (by 50% margin!), if the EIA count is correct then operators
have enough inventory to keep running through YE22. In today's Energy Stat, we outline why we believe the EIA number is significantly inflated
and the "real" DUC number is much lower. This means DUCs will reach normal levels by YE21, which provides more bullish support for 2022+
macro oil outlook."

"Bottom Line: Investor concerns that an ample supply of drilled but uncompleted wells will allow operators to both meet freshly unveiled
investment rate targets (usually 60-70%) while still growing supply nicely due to the low-cost of bringing these wells online is unfounded. For one,
the EIA DUC count is ~22% to high and contains many older wells that are likely to never be completed and, even if they were, would not produce at
near the rate as wells drilled with cutting-edge technology and lateral lengths. Adding to this, the wave of acreage consolidation through mergers
we saw in 2020 has enhanced the ability of operators to utilize pads of greater size in increasing frequency which has in turn increased the optimal
"months of inventory" to between 5-6 months. At the current pace of DUC draws, we reach normal levels by the end of this year, requiring more
spending to hold completions levels flat in 2022 and constraining supply growth."

[KGardiner]

Dan,
Given that DUCs are unlikely to be a long term solution for producers, it seems to me that the oilfield services companies like SLB, HAL and BKR are positioned to benefit greatly the next 2 years. I know they got royally clobbered last March when the producers shut most everything down, and they are slowly coming back. I'm curious what your perspective is on these three services companies, and how their bottom line looks going forward using the kind of analysis you've provided for the Sweet 16 producers.

Just to be clear, I am currently long SLB, HAL and BKR, and would like to understand the relative opportunity of the Services versus the Sweet 16.

Thanks
Kevin Gardiner

[dan_s]

All three of these large-cap oilfield service companies will survive and do well when oil prices move over $60/bbl. Keep in mind that SLB did selloff a big chunk of their U.S. well completion business to Liberty Oilfield Services (LBRT).

I also recommend you take a look at HP. They have the best horizontal drilling rigs on Earth and they pay a decent dividend.
Helmerich & Payne (NYSE:HP) declared a dividend payable on March 1, 2021 to its shareholders as of December 11, 2020. It was also announced that shareholders of Helmerich & Payne's stock as of February 12, 2021 are entitled to the dividend. The stock is expected to become ex-dividend 1 business day(s) before the record date. The ex-dividend date for Helmerich & Payne will be on February 11, 2021. The company's current dividend payout is at $0.25. That equates to a dividend yield of 3.89% at current price levels.

[KGardiner]

Thanks Dan,
I will definitely take a closer look at both HP and LBRT.
Kevin