B of A take on the active rig count - Dec 14
Posted: Mon Dec 14, 2020 11:49 am
The 2019-20 US rig downturn mimicked the previous one. It has been 100 weeks since the US horizontal (hz) rig count peaked at 948, where United States this Jan’19 peak was 31% below the prior peak of 1,372 back in late’14. Hz rig activity this downturn, which really began in early’19, ultimately took 83 weeks to bottom, falling 78% from the peak . Interestingly, this is nearly identical to the 77% decline that occurred over 79 weeks following the 2014 collapse in oil prices. The prior oil bust downturn (2015 -16) started with an initial intense drop followed by a steady decline, while the 2019-20 downturn saw a steady slide at first followed by a sharp COVID-induced drop towards the end April, the two downturns converged to roughly the same spot after about 80 weeks.
So far, this recovery is actually outpacing the prior one. We are now 17 weeks into the US rig recovery, and the hz rig count is up 48% off the bottom vs +28% at this point last cycle and +22 % post the financial crisis. However, un like the previous cyclical recovery, we do not expect rig activity to eclipse prior cycle peaks, where our forecast calls for hz rig activity to peak at just over 500 during 2H23. That s 46% below last cycle’ s peak. Recall last cycle’ s peak hz rig activity peaked 31% below the late’ 14 peak. Thus, this cycle we expect hz rig activity to recover (vs trough) by about 150% compared to 202% last cycle and 269 % during the post ’08 recovery. As you can see, each US shale rig recovery has been weaker than the previous . And despite such a strong bounce off the bottom so far (thanks OPEC+), we don’t expect things to change this cycle. And we also note that, unlike the prior recovery, we do not expected stimulated lateral length to recovery back to prior cycle highs, instead missing 2Q19’s prior peak by about 25% . But even using this more modest recovery trajectory, our ’22 / ’23 EBITDA estimates are still 11% /19% higher, on avg., than consensus.
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Keep in mind that 2021 capital expenditure budgets are probably locked in by now. Public companies are under intense pressure to "live within operating cash" and use free cash flow to pay down debt and pay stockholders with dividends and/or stock buybacks. I expect the active rig count to flatten or even decline in Q1 do to winter weather. A meaningful increase in the active rig count won't be seen until WTI is firmly over $50/bbl.
The combination of fewer public upstream companies, thanks to mergers and bankruptcies, and more portfolio managers expected to rotate money back into this over-sold sector should push up share prices. A lower level of FEAR should increase the multiples these companies are trading for. As I pointed out in the Saturday podcast, high quality companies like our "Elite Eight" should be trading for at least 8X operating cash flow per share.
So far, this recovery is actually outpacing the prior one. We are now 17 weeks into the US rig recovery, and the hz rig count is up 48% off the bottom vs +28% at this point last cycle and +22 % post the financial crisis. However, un like the previous cyclical recovery, we do not expect rig activity to eclipse prior cycle peaks, where our forecast calls for hz rig activity to peak at just over 500 during 2H23. That s 46% below last cycle’ s peak. Recall last cycle’ s peak hz rig activity peaked 31% below the late’ 14 peak. Thus, this cycle we expect hz rig activity to recover (vs trough) by about 150% compared to 202% last cycle and 269 % during the post ’08 recovery. As you can see, each US shale rig recovery has been weaker than the previous . And despite such a strong bounce off the bottom so far (thanks OPEC+), we don’t expect things to change this cycle. And we also note that, unlike the prior recovery, we do not expected stimulated lateral length to recovery back to prior cycle highs, instead missing 2Q19’s prior peak by about 25% . But even using this more modest recovery trajectory, our ’22 / ’23 EBITDA estimates are still 11% /19% higher, on avg., than consensus.
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Keep in mind that 2021 capital expenditure budgets are probably locked in by now. Public companies are under intense pressure to "live within operating cash" and use free cash flow to pay down debt and pay stockholders with dividends and/or stock buybacks. I expect the active rig count to flatten or even decline in Q1 do to winter weather. A meaningful increase in the active rig count won't be seen until WTI is firmly over $50/bbl.
The combination of fewer public upstream companies, thanks to mergers and bankruptcies, and more portfolio managers expected to rotate money back into this over-sold sector should push up share prices. A lower level of FEAR should increase the multiples these companies are trading for. As I pointed out in the Saturday podcast, high quality companies like our "Elite Eight" should be trading for at least 8X operating cash flow per share.