The way US E&P operators are adding rigs, planning activity ramp-ups, preparing to raise capex and looking forward to renewed production growth in 2017, you'd be tempted to write finis to a harrowing two-year industry downturn.
During third-quarter 2016 earnings calls in the last few weeks, oil operator after operator unveiled what became surprisingly repetitive near-term plans: stirring the production pot by slipping a rig or two into the field during the final months of this year, kicking up the capital budget modestly and then returning to production growth in 2017.
'Third quarter results tell the story of good, old fashioned American ingenuity,' Robert W. Baird analyst Ethan Bellamy told S&P Global Platts. 'Costs are down, productivity is up, and capital is flowing into the most productive regions.'
CEOs certainly displayed sunnier dispositions on conference calls than a couple of quarters ago when the specter of what then was a recent period of $30/b oil was fresh in their minds.
But now, with a new year looming, oil executives seemed energized by their victory over a low-priced oil world after two years of squeezing costs and efficiencies from oil fields and developing precise completion designs to extract still more oil and gas per well. So they appeared willing to open the purse strings a bit next year-and if oil prices cooperated, rev up the drilling machine and production spigot in the months to come.
But beneath their show of confidence, oil executives appeared mindful of the sobering and ongoing volatility of oil prices. Most clearly conveyed that any stepped-up activity would be done prudently until price signals indicated otherwise. Larger operators in particular said higher prices of mid-$50s/b to $60/b were needed for next-stage growth.
Paul Horsnell, head of commodities research for Standard Chartered Bank, noted industry still is not investing according to the oil price curve. Front-month WTI closed Friday at $45.69/b, while forward prices in June and December 2017 settled at $49.49/b, and $50.60/b, respectively.
'On average, they are maybe planning on the basis of the curve minus at least $5' per barrel, Horsnell said. 'So, not overly aggressive.'
But even as the outlook for 2017 turns up, independent E&Ps as a group showed financial losses from July to September for the eighth straight quarter, he said.
Despite losses, rig count growing
While the losses were half that of three months before and only 15% of the loss in the same 2015 period, 'it was another loss on top of a lot of other losses,' he said.
Q3 results 'show an industry that is behaving like survivors from a storm: very happy to be alive, but still facing the task of clearing up a lot of wreckage,' Horsnell added.
While 153 oil rigs have been added in US fields during the last six months, and 19 in the last week alone, not all operators are necessarily planning production growth. Some are preparing for flat output next year. ConocoPhillips is eyeing flat to 2% growth in 2017 output while others, like Whiting Petroleum and Murphy, could hold next year's output flat with Q4 2016.
On the other hand, several operators have forecasted double-digit output growth, notably from the Permian Basin in West Texas and New Mexico: Pioneer Natural Resources expects 13% to 17% production increase next year that includes 23% to 27% oil output growth. Concho Resources sees 20% per year total production growth for 2017-2019 and Diamondback Energy eyes more than 30% output growth.
To meet those estimates in the Permian Basin, operators added 50 rigs in Q3 and so far in Q4 have added another 26 to a total of 229 rigs, nearly 100 more than all other major US shale plays combined.
Although the EIA has forecasted US oil production down 110,000 b/d or 1.2% for 2017 year over year, the agency 'may be underestimating the capital efficiency being realized by US E&Ps, UBS analyst Bill Featherston said in a recent investor note. And that could potentially 'prolong the oil price recovery or lower the medium-term normalized oil price.'
UBS' own oil production model, based on EIA data, currently calls for 2017 volumes to be down roughly 340,000 b/d year over year or 4%, and 2018 output up around 85,000 b/d or 1% year on year.
While oilfield service and equipment providers recently cautioned they would likely soon take back some of the 15% to 30% or more in price concessions granted to oil companies early in 2015, this may not happen until late next year or possibly even 2018, Robert W. Baird analyst Dan Katzenberg said.http://www.oilvoice.com/n/End-of-downturn-at-hand-Operators-behavior-suggests-so-Fuel-for-Thought/90663a04aff3.aspx