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Pullback in energy output may be nearing end amid recovery in prices, rigs

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Essential Energy Insights - October 2021


Pullback in energy output may be nearing end amid recovery in prices, rigs

The slowdownin natural gas production growth and the decline in oil output may be nearing anend, as the rise in prices since a bottom was formed earlier this year has led tosigns that some producers may be willing to ramp up output in the second half ofthe year.

Prices reacted to production slowdown

The second-quarterearnings reporting season is beginning and energy markets will be keenly focusedon production signals from drillers to see whether prices have recovered to a levelhigh enough to prompt an increase in output.

Sofar, indications from the U.S. Energy Information Administration show that naturalgas production growth has merely slowed over the past year while crude oil outputhas fallen since reaching a peak in April 2015, according to the agency's latest"Short-Term Energy Outlook."

The changesin production trends have been the result of a 77.0% decline in natural gas rigcounts through May and June following a peak in late 2014, and an 80.4% drop inthe number of rigs targeting crude oil in the same time frame.

Productionhas also fallen in reaction to sharp declines in prices in 2014 and 2015, whichappear to have finally reached a bottom earlier this year. Prices of crude oil formeda bottom during the current cycle at $26.05/bbl on Feb. 11 and rose to more than$51.50/bbl on June 9, but retrenched to below $44.00/bbl on July 20.

Likewise,the price of natural gas reached a low of $1.611/MMBtu on March 4 and reboundedto just below $3.00/MMBtu on July 1 before falling toward $2.65/MMBtu on July 20.

The recoveryin prices has begun prompting increases in rig counts where, through the week endedJuly 15, the number of rigs targeting natural gas have rebounded 8.5% while thosetargeting crude oil jumped 13.0%.

The EIAprojects an increase in natural gas output from 74.09 Bcf/d in June 2016 to 77.25Bcf/d by the end of 2017, while production of crude oil will fall from 8.63 MMbbl/dto 8.35 MMbbl/d over the same period.

Outputof propane from gas processing plants is anticipated to follow a path similar tonatural gas, with production rising from 1.14 MMbbl/d in June to 1.24 MMbbl/d inDecember 2017. Natural gas liquids supplies should rise from 3.46 MMbbl/d to 3.94MMbbl/d over the same period.

Production showing signs of recovery

Indicationsso far suggest that the recovery in oil output may come sooner than projected. Inits monthly STEO reports, the EIA has projected a trough in oil production in September2017, but has been upwardly revising the figure from a low of 7.79 MMbbl/d in theApril STEO to 8.00 MMbbl/d in the most recent report.

Two companiesthat drill for shale oil and gas provided operational updates in the past week,which may shed light not only on the upcoming earnings season but also trends inproduction and prices.

has operationsfocused on the Marcellus and Utica shale plays and said on July 14 that averagenet daily gas production was flat sequentially but up 19% from the prior-year quarter.Average net daily liquids production reached a record, increasing 10% sequentiallyand 63% from the prior-year quarter.

The companybenefited from prices received that were boosted by hedges but also importantly, measures were announced thatwere indicative of some easing of the current market tightness.

"Currentdrilling and completion costs have declined to $0.9 million per 1,000 feet of lateralin the Marcellus and $1.04 million per 1,000 feet of lateral in the Utica, bothfor a 9,000-foot lateral, each representing a 24% reduction from 2015," thecompany said in its update.

Anteroalso signed a definitive agreement to acquire approximately 55,000 net acres inthe core of the Marcellus Shale for $450 million and underwrote a public offeringof 26.75 million common shares. Well productivity was also demonstrated througha company record 7,274-foot lateral drilled in 24 hours. The company is operatingsix drilling rigs in the Marcellus and one in the Utica Shale play.

, with operationscentered in the Eagle Ford, said on July 19 that it produced 55,898 Boe/d and exceededthe high end of its guidance for the quarter, which expected production of 50 MBoe/dto 52 MBoe/d. The rate of production was down 1.1% from the prior quarter, but itwas up 3.7% from the same quarter a year ago.

Full-yearproduction guidance issued in the company's first quarter update expected 48 MBoe/dto 52 MBoe/d, which could be eclipsed if output is maintained at second-quarterlevels.

"Averagecost per well during the second quarter came in at approximately $3.3 million, andour continuing focus on process improvements and efficiency gains resulted in severalwells coming in below $3.0 million," Tony Sanchez, CEO of Sanchez Energy, saidin the press release. "At the same time, well performance continues to improveas we test improved completion designs."

In apresentation on May 9, the company showed that average well costs were around $7.4million in 2014 and fell to around $3.5 million in 2015.

Profitability offers breathingroom

The abilityto continue well development, issue stock and acquire new acreage is a differentcircumstance from that seen six months or a year ago when grim conditions forced asset sales, layoffs and several defaults.

"Giventhese operational highlights, we calculate AR generated unhedged revenue of $342million unhedged, and $635 million including the effects of realized hedging gains,"analysts at CreditSights said in a note July 18. "Holding production costs,interest expense, and tax rates flat from the prior quarter, we estimate a 2Q16adjusted net income of $41 million, or $0.14/share, and adjusted Ebitda of $328million."

The breathingroom that profitability affords companies will allow them to repair , make investments or raiseproduction.

The EIAsaid in a column July 18 that oil companies are closer to balancing capital investmentwith operating cash flow, and that the need for oil companies to find external sourcesof funding may decline. Reductions in capital expenditures are bringing companiescloser to self-finance, the agency said.

It isalso likely no coincidence that the bottoms in oil and gas prices in February andMarch, respectively, have led to the rise in rig counts following their bottomsthree months later in May and June, respectively.

The numberof rigs targeting natural gas has increased seven through the week ended July 15from their June low while crude oil rigs have gained 41 since a low was formed inlate May.

The PermianBasin has seen the largest jump in oil rigs, with a gain of 23. The Williston Basinis a distant second with an increase of five rigs over the same period.

"We'reexpecting progress to continue in the Permian, especially in the Delaware Basin,inclusive of operational updates regarding incremental resource delineation, higherintensity fracs, and longer laterals," analysts from Tudor Pickering Holt &Co. said in a note July 20. "Gas continues to be topical, with our view beingthat NE gas growth will remain strong going into 2017 on expectations for tighterdifferentials, continued well outperformance, and a now-consensus view that natgas prices will rapidly improve going into 2017."

ApacheEnergy and Devon Energy Corp.are two companies that have operations in the Permian and are scheduled to reportearnings in early August. Their comments could have strong repercussions for energyprices in the months to come.

Market prices and included industrydata are current as of the time of publication and are subject to change. For moredetailed market data, including powerand naturalgas index prices, as well as forwardsand futures,visit our Commodities Pages.