From Oilprice.com:
<<it appears that some producers are ready to start drilling again the moment WTI reaches a certain level. Interestingly enough, this level is below most companies' breakeven price. Bloomberg reported this week that companies, including Parsley Energy, Centennial Resource Development, and Diamondback Energy, were ready to reverse the production cuts when prices rose to $24 (for Centennial) or $30 (for Parsley). It sounds counterintuitive when demand is still severely depressed and the inventory overhang is enormous. But some producers have little choice. They have a debt to repay.>>
Sweet 16 E&Ps in the spotlight. What does this do for the theory of future s/d recovery (survive and thrive)?
Survive and thrive theory
Re: Survive and thrive theory
1. U.S. oil production will continue to decline until WTI is well over $50/bbl. It was heading down even when WTI was over $60/bbl. U.S. oil production peaked in November, 2019.
2. Each company is unique. Some companies have drilling obligations that must be met or they will loose leasehold. Plus, they have a lot of oil hedged at good prices.
3. All in cash expenses to operate oil wells is $10 to $12 per barrel, so they do generate positive cash flow with oil selling for over $20/bbl.
Parsley and Diamondback are in good shape and they are committed to live within cash flow from operations. Operating cash flow is shown at the bottom of each forecast model.
Drilling and Completion operations never go to zero.
2. Each company is unique. Some companies have drilling obligations that must be met or they will loose leasehold. Plus, they have a lot of oil hedged at good prices.
3. All in cash expenses to operate oil wells is $10 to $12 per barrel, so they do generate positive cash flow with oil selling for over $20/bbl.
Parsley and Diamondback are in good shape and they are committed to live within cash flow from operations. Operating cash flow is shown at the bottom of each forecast model.
Drilling and Completion operations never go to zero.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Survive and thrive theory
Per Baker Hughes:
The active drilling rig count in the U.S has declined from 1,088 to 374 over the last twelve months, with most of it happening in the last three months. My guess is that it will continue to decline to about 200 active rigs by the end of May. A decline of this magnitude has NEVER happened before.
Completion equipment and crews are being laid off even faster.
We need ~800 rigs drilling for oil just to hold U.S. oil production flat. Per EIA, just in the last six weeks U.S. oil production has declined by a million barrels per day. Sub-economic oilfields are being shut-in as fast as possible.
More than half of the oil wells being drilled today will be cased but not completed until oil prices move higher. Some will be completed for strategic purposes to hold leasehold or to add more proven reserves at year-end.
The active drilling rig count in the U.S has declined from 1,088 to 374 over the last twelve months, with most of it happening in the last three months. My guess is that it will continue to decline to about 200 active rigs by the end of May. A decline of this magnitude has NEVER happened before.
Completion equipment and crews are being laid off even faster.
We need ~800 rigs drilling for oil just to hold U.S. oil production flat. Per EIA, just in the last six weeks U.S. oil production has declined by a million barrels per day. Sub-economic oilfields are being shut-in as fast as possible.
More than half of the oil wells being drilled today will be cased but not completed until oil prices move higher. Some will be completed for strategic purposes to hold leasehold or to add more proven reserves at year-end.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Survive and thrive theory
FIRST QUARTER 2020
Goehring & Rozencwajg
Natural Resource Market Commentary dated May 7, 2020
"Furthermore, future supply will be impacted by the huge retrenchment in drilling activity
taking place today. The US oil rig count has fallen 45% in the last six weeks alone and our
models suggest these declines will continue. Of the publicly traded companies we follow,
capital spending has been cut by 40% on average so far with many companies now announcing
a second round of cuts. In total, we estimate that the US oil rig count will fall by nearly 75%
from 2019 levels. Our proprietary neural network tells us that US production will decline
sharply by 2.1 mm b/d as we progress throughout 2020 based on these drilling assumptions
(before considering any shut-ins). In other words, based upon capital spending guidance,
new production would not nearly be enough to offset natural field declines from aging wells.
This phenomenon would then continue into 2021 unless drilling activity were sharply
increased later this year (something we think is unlikely).
In the rest of the non-OPEC world, several final investment decisions (FIDs) have already
been postponed or rejected on long lead-time projects making it a near certainty that
production from this group will decline well into the 2020s. Summer maintenance programs in the
North Sea will likely be deferred as well, saving near-term cash at the expense of production.
Together with the shut-ins discussed above, attrition from lower drilling expenditures and
deferred maintenance could cause global production to fall to 80.5 mm b/d by the end of 2020.
This sets up the potential for a significant under-supplied global oil market in less than a year:
G&R continues:
"As demand normalizes, today’s large inventory overhang will be worked off much faster than
anyone realizes. For example, “full” crude storage is approximately 3.5 billion bbl while the
15-year low level is 2.5 billion bbl. In the oil section of this letter we will discuss demand drivers
in depth, but for now assume that demand normalizes slowly over the year eventually reaching
95 mm b/d by year end. < Note that global demand was over 100 million b/d in 2019.
While this sounds optimistic, we should point out this projection
assumes demand would still be lower year-on-year by 5 mm b/d by year end (a conservative
estimate). Were production to average 80.5 mm b/d, then global inventories would go from
“full” to 15-year low levels in only two months. Even if OPEC+ fully reversed their production
cuts, inventories would go from full to dangerously low in just under five months.
However, the reality in 2021 may be even more dramatic. Demand will likely continue to
normalize, adding the remaining lost 5 mm b/d to regain the 100 mm b/d level. At the same
time, the shales will continue to decline well into 2021, opening the gap between supply and
demand to well over 10 mm b/d sometime next year."
Goehring & Rozencwajg
Natural Resource Market Commentary dated May 7, 2020
"Furthermore, future supply will be impacted by the huge retrenchment in drilling activity
taking place today. The US oil rig count has fallen 45% in the last six weeks alone and our
models suggest these declines will continue. Of the publicly traded companies we follow,
capital spending has been cut by 40% on average so far with many companies now announcing
a second round of cuts. In total, we estimate that the US oil rig count will fall by nearly 75%
from 2019 levels. Our proprietary neural network tells us that US production will decline
sharply by 2.1 mm b/d as we progress throughout 2020 based on these drilling assumptions
(before considering any shut-ins). In other words, based upon capital spending guidance,
new production would not nearly be enough to offset natural field declines from aging wells.
This phenomenon would then continue into 2021 unless drilling activity were sharply
increased later this year (something we think is unlikely).
In the rest of the non-OPEC world, several final investment decisions (FIDs) have already
been postponed or rejected on long lead-time projects making it a near certainty that
production from this group will decline well into the 2020s. Summer maintenance programs in the
North Sea will likely be deferred as well, saving near-term cash at the expense of production.
Together with the shut-ins discussed above, attrition from lower drilling expenditures and
deferred maintenance could cause global production to fall to 80.5 mm b/d by the end of 2020.
This sets up the potential for a significant under-supplied global oil market in less than a year:
G&R continues:
"As demand normalizes, today’s large inventory overhang will be worked off much faster than
anyone realizes. For example, “full” crude storage is approximately 3.5 billion bbl while the
15-year low level is 2.5 billion bbl. In the oil section of this letter we will discuss demand drivers
in depth, but for now assume that demand normalizes slowly over the year eventually reaching
95 mm b/d by year end. < Note that global demand was over 100 million b/d in 2019.
While this sounds optimistic, we should point out this projection
assumes demand would still be lower year-on-year by 5 mm b/d by year end (a conservative
estimate). Were production to average 80.5 mm b/d, then global inventories would go from
“full” to 15-year low levels in only two months. Even if OPEC+ fully reversed their production
cuts, inventories would go from full to dangerously low in just under five months.
However, the reality in 2021 may be even more dramatic. Demand will likely continue to
normalize, adding the remaining lost 5 mm b/d to regain the 100 mm b/d level. At the same
time, the shales will continue to decline well into 2021, opening the gap between supply and
demand to well over 10 mm b/d sometime next year."
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Survive and thrive theory
G&R Conclusion:
"We believe the oil market has been hit with several massively negative events that will unlikely
be repeated in our investment lifetimes. The unprecedented collapse of demand due to global
quarantining combined with a price war between Russia and Saudi Arabia all helped create
the situation the market faces today.
While the headlines remain bleak, we believe the stage has now been set for a massive rebound
in oil prices. Although few energy analysts recognized this, the US oil shales had already
rolled over nearly three months before the novel coronavirus hit. The “shale miracle” that
has cast a huge negative supply shadow over the global oil market over the last 10 years has
now drawn to a close. Given the huge capital spending cutbacks that have been announced
over the last two months, we believe the only significant source of supply growth over the
last decade has now disappeared.
As demand recovers, the world will face a huge shortage of crude oil. Please read
the introduction to this letter, where we frame what is likely to happen to supply in the next two
years. This bear market has taken much longer to end than we ever thought possible. We
originally believed the oil market bottomed following the last spasm of panic selling in the
first quarter of 2016 when oil hit $26 per barrel. In retrospect we were incorrect. We think
the bottom has now finally been hit.
"We believe the oil market has been hit with several massively negative events that will unlikely
be repeated in our investment lifetimes. The unprecedented collapse of demand due to global
quarantining combined with a price war between Russia and Saudi Arabia all helped create
the situation the market faces today.
While the headlines remain bleak, we believe the stage has now been set for a massive rebound
in oil prices. Although few energy analysts recognized this, the US oil shales had already
rolled over nearly three months before the novel coronavirus hit. The “shale miracle” that
has cast a huge negative supply shadow over the global oil market over the last 10 years has
now drawn to a close. Given the huge capital spending cutbacks that have been announced
over the last two months, we believe the only significant source of supply growth over the
last decade has now disappeared.
As demand recovers, the world will face a huge shortage of crude oil. Please read
the introduction to this letter, where we frame what is likely to happen to supply in the next two
years. This bear market has taken much longer to end than we ever thought possible. We
originally believed the oil market bottomed following the last spasm of panic selling in the
first quarter of 2016 when oil hit $26 per barrel. In retrospect we were incorrect. We think
the bottom has now finally been hit.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group