21
Feb

Wrap – Week Ended 2/20/15

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Questions and comments under the Wrap will be addressed in the Monday post. 

We'll have the Wrap Table out tomorrow but for now here are a few graph sets and comments contrasting the last down cycle in oil and gas prices (2008/2009) and the commensurate reaction in the rig count with the current cycle. We continue to see some analysts, traders, and other forms of talking heads saying that the decline in rigs doesn't matter pointing to last cycle and what happened with production then.

It's a fair point if a misleading one as a number of factors are in fact different this time. 

We also note that the use of percentages can be misleading so we'll reference them but it's the number of rigs and the rig type (horizontal or vertical and gas or oil directed) that really matters relative to Basin/Play declines. 

In the 2008/09 cycle, rig counts came off sharply.  Oil rigs and natural gas rigs fell 58% and 59% respectively.

  • Oil vs Gas Directed Rigs - In the 2008/2009 cycle, the decline was dominated by natural gas directed drilling (see Chart A1), where the count fell 941 rigs peak to trough vs the oil directed drop of 249 rigs.
  • And the decline in total rigs was dominated by vertical rigs (see chart A2) which shed 686 rigs during the drop, with horizontals off 278 peak to trough.
  • U.S. Oil production was lower ... during the period oil production peaked in Spring 2009 at ~ 5.5 mm bopd, about 4 months after the peak in rigs, and it retreated for several months before ending the year just above that level. It is clear that the majority of the drop in the horizontal rig count during this cycle was attributable to natural gas directed rigs fleeing plays like the Haynesville Shale and within months showing up in other, oilier plays. Note that Basin declines in terms of aggregate barrels were smaller at this point.
  • ... And it was largely conventional. Note also, that less production was coming from the higher decline rate Shale plays vs Conventional plays in this cycle. In 2008, 25% of U.S. oil production was coming from the 5 big name current oily plays (Permian, Bakken, and Niobrara where the majority of unconventional production and even a portion of that was conventional).  The Eagle Ford was tiny at the time.   

rigs 20082009

 

Fast forward to the 2014 to 2015 cycle.

  • Oil vs Gas Directed Rigs - a different story than last time. Since the October 10, 2014 rig count peak, total rigs are off 620 with gas directed rigs off 31 (down 10%) and oil directed rigs off 590 (down 37%).  We're not done yet as a number of our closely tracked and in several cases owned names plan to shed rigs through the end of 2Q15,
  • Rig Type - also a different story this time as horizontals dominate the drop. In the current cycle to date, horizontal rigs are down 393 (down 28%). Vertical rigs have dropped 169 (down 45%) since October but were already falling early in the year last year and are down 206 rigs since the highs of 2014 (the recent time period has however shown a more pronounced drop). The balance of the decline in rigs comes from "directional" rigs that are off sharply as well. 
  • From an average well perspective, first 30 days production from a horizontal rig is going to generally range from 3x to 5x the contribution of a vertical oil well.  Plays like the EFS and Bakken are not vertical well plays. While the Permian has been more mixed, a big portion of the drop to date in vertical rigs has come from that play.  
  • We understand the efficiency arguments as well and would comment that having been on 40 to 50 upstream conference calls each quarter for over a decade now, we can say that technology gains have been remarkable. We have factored into our thinking near monthly improvements in first 30 days production and drilling efficiencies. The efficiency gains were slowing by late 2013 and comments by many of our names indicate that while further room for improvement in spud to TD times and reduced frac stage spacing lie ahead, the great leaps of the past are behind us with smaller increments likely as we move forward. 
  • U.S. production is now also much more unconventional focused (higher decline rates) with 56% of U.S. volumes coming from the big 5 shale plays as of late 2014. 

US oil production with unconventional Nov 2014

  • The wells being drilled now are in the core of cores and those are going to generally display higher early day production vs what we've seen in even the recent past. So the wells have been bigger and will continue to be incrementally bigger as we move ahead at the slower rig pace.  
  • However, early days well production has been moving up in each of the major oil plays for some time now. This newer bigness works the other way too.  Take out a lot of rigs quickly, especially rigs that were increasingly focused on higher decline rate prospects, and you rapidly lose the ability to replace Basin/Play declines. Our math on this was included in a recent post here, which was calculated prior to the last two weeks of rig count declines. In short, it becomes increasingly difficult to fight play declines for example in the Bakken and Eagle Ford (6% and near 8% respectively per month). 
  • Note that this says nothing of the now hundreds of recently drilled wells that are being deferred, many of them until the end of 2015 in an effort to a) obtain still lower service costs, b) obtain higher oil prices at the time of flush initial production, and c) stave off corporate declines and get a head start on 2016's return to growth. 

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20
Feb

T.G.I.F.

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Market Sentiment Watch: Greece on the broad market's mind. Ukraine a bit less so. In energy land, the now weekly watching of the rig count report is in play. We expect further drops but caution that the pace will moderate. The writing for lower production is however on the wall however as large and small operators, with solid and stressed balance sheets alike, dramatically hack back capex.  In today's post please find an update of the ZLT PIE, the oil inventory slide show (another bigger than expected build but imports are at record lows too and refiner utilization will soon bottom), the natural gas inventory slide show (in line, looking for the next two reports to be much more constructive), comments on the COG quarter (solid), the CRC quarter (big budget cut, to hold volumes flat - see comments and new cheat sheet below), and some other odds and ends. 

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Natural Gas Inventory Review
  4. Stuff We Care About Today - COG, CRC
  5. Odds & Ends

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19
Feb

Thursday Morning – More 4Q14 E&P Earnings

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Market Sentiment Watch: Greece holding broad market attention again today. In energy land we get both the natural gas and oil inventory reports today due to the holiday an all eyes will be focused on the oil report after an ugly looking API report last night (see Commodity Watch section). In today's post please find comments on reported quarters for REXX (in line EBITDA, reiterated guidance),  EOG (miss on in line volumes), and highlights from a number of other watched but unowned names. 

Ecodata Watch:

  • We get Jobless Claims at 8:30 am EST (F = 290,000, last read was 304,000), 
  • We get Philly Fed at 10 am EST (F = 8.0, last read was 6.3), 
  • We get Leading Indicators at 10 am EST (no forecast, last read was 0.5%)

 

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watc​h - with oil and natural gas inventory previews
  3. Stuff We Care About Today - REXX, EOG, Earnings Briefs (late reporting names, to be added as time permits today)
  4. Odds & Ends

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18
Feb

Wednesday Morning – Earnings Season Starting To Heat Up

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Market Sentiment Watch: Greek drama continues to impact markets. Meanwhile the Middle East North Africa risk premium is creeping back (our view) into oil prices just as eyes start to focus on the second half's much higher demand and a time that is past the peak of U.S. oil inventories. Also in energy land XEC and DVN joined the ranks of the recently growth, oily big cap names that are going to not really be growing past a 4Q/1Q peak this year.  XEC did it's part by slashing the budget and taking rigs from 22 at YE14 to a planned 6 during 2Q15.  In today's post please find a number of comments on Permian names FANG, VNOM, and XEC reporting today along with comments on PVA's much anticipated reduced spending capital spending program.  

Ecodata Watch:

  • We get PPI at 8:30 am EST (F = -0.5%, last read was -0.3%),
  • We get Housing Starts at 8:30 am EST (F = 1.07 mm, ast read was 1.06 mm),
  • We get Industrial Production at 9:15 am EST (F = 0.4%, last read was -0.1%), 
  • We get Capacity Utilization at 9:15 am EST (F = 79.9%, last read was 79.7%),
  • We get the FOMC minutes at 2 pm EST.  

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Stuff We Care About Today – FANG/VNOM, XEC, PVA
  4. Odds & Ends

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17
Feb

Tuesday Morning

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Market Sentiment Watch: Ukraine and Greece in the market's focus today. In energyland, E&P earnings season starts to get a lot busier this week (please see the Energy Calendar Week 5 in the Stuff section below). In today's post please find The Week That Was, comments on HK, RICE, and a few other odds and ends. 

Ecodata Watch:

  • We get Empire State at 8:30 am EST (F = 10.5, last read was 10.0),
  • We get the Home Builders' index at 10 am EST (F = 58, last read was 47)

The Week Ahead:

  • Wednesday 2/18: PPI, housing starts, industrial production, capacity utilization, FOMC minutes, 
  • Thursday 2/19: Jobless claims, Philly Fed, leading indicators, 
  • Friday 2/20: Markit Flash PMI. 

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watc​h
  3. The Week That Was
  4. Stuff We Care About Today - 4Q14 Earnings Week 5, HK, RICE
  5. Odds & Ends

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