Why "Drill Baby Drill" won't work this time - Jan 22

[dan_s]

From OilPrice.com:

The latest Baker Hughes survey has revealed that U.S. oil drilling has declined dramatically to just one rig above its post-pandemic lows. Active oil drilling rigs fell by two week to week to 478 in the latest survey, leaving activity just one rig above its post-pandemic low; 149 rigs below November 2002’s post-pandemic high and 73 rigs lower than at the time of President Trump’s 2017 inauguration.

Outside of the Permian Basin, U.S. oil production is on decline.

There are other structural and technical challenges that could limit how quickly the U.S. Shale Patch increases oil production under Trump. According to commodity experts at Standard Chartered, U.S oil production, and particularly unconventional (shale oil) production, has changed significantly from the time Trump first took office in 2017.

StanChart points out that U.S. crude output clocked in at 13.40 million barrels per day (mb/d) in August 2024, an all-time high above the previous record of 3.31 mb/d set in December 2023. U.S. crude production has increased by 4.7 mb/d since the pandemic-era low of May 2020; however, it’s just 0.4 mb/d higher than the pre-pandemic high of November 2019, working out to an annual production growth rate of just 80 thousand barrels per day (kb/d) over this timeframe.

StanChart notes that the dynamics of U.S. shale oil production make long-term supply increases difficult to maintain, noting that the country’s oil production is dominated by a few majors and independent producers, alongside private companies, rather than a national oil company as is often the case with many OPEC producers. These companies have largely left behind their trigger-happy, drill-baby-drill days and adopted strict capital discipline, eschewing rapid production increases in favor of returning more capital to shareholders in the form of dividends and share buybacks. StanChart also points out that extensive M&A activity in the sector has reduced the number of operating companies, changing the landscape from a patchwork of small producer acreages to larger contiguous acreage. This new modus operandi allows for complex drilling and completion techniques, including multi-pad wells with extremely long lateral sections that are able to optimize spacing and associated infrastructure. These drilling and completion efficiency gains have allowed production to continue growing despite a decline in rig count.

StanChart’s views appear to match those of Goldman Sachs’. According to GS, technological and efficiency gains have accounted for virtually all growth by the Texas-New Mexico shale basin since 2020; however, the bank has warned that “the Permian is maturing, and its deteriorating geology will weigh on the production of crude oil down the road.” The Permian rig count has declined nearly 15% from last year’s April high to 309 currently, and is 30% lower than its 2018-2019 average, Goldman Sachs has revealed. Earlier, GS predicted that the Permian rig count will be below 300 by the end of 2025.

By Alex Kimani for Oilprice.com

Bottomline: Upstream oil & gas companies are not going to expand their drilling program unless there is a significant increase in the price oil.

All of our Sweet 16 companies were profitable in 2024 with WTI oil averaging slightly over $75/bbl and natural gas prices averaging slightly below $2.25/MMBtu. They all generated more than enough operating cash flow to fund 100% of the drilling & completion costs and have free cash flow left over to pay dividends, buyback stock and pay down debt.
Antero Resources (AR), added to the Sweet 16 this year, is the only Sweet 16 company that does not pay dividends. AR is a "gasser" and one of the top producers of NGLs, so it will be extremely profitable this year.