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Highlights

Rig count may drop 50 in next couple weeks: Enverus analyst

Count could drop 100 if oil price/demand scenario persists

Permian bears brunt of week's rig drops: down 12 to 416

Houston — The US oil and gas rig count fell 22 to 813 on the week, rig data provider Enverus said Thursday, as domestic upstream operators deepened their 2020 budget and activity pullbacks in response to low crude prices and sharply reduced oil demand.

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The worst is far from over, observers say, as companies continue to trim their operations to the bone. In the two weeks since crude began free-falling from levels around $46/b, some companies have reduced capital spending not only once, but twice.

"Just from what we've seen in capital spending announcements by some of the bigger operators in the past couple of weeks, I expect the rig count to drop by about 50 rigs in the next couple of weeks," said Bob Williams, Enverus' director of content.

"It could easily be double that if this goes on for another month," Williams said.

Oil prices were drifting down from above $50/b at the start of 2020 but took a sharp turn for the worse earlier this month when Russia refused to comply with further proposed production cuts by Saudis and other OPEC members. The result was market panic over a perceived future oil glut and a further steep price drop the last nine trading days.

On Thursday afternoon, NYMEX crude futures were trading at $25.34/b, up $4.97.

According to S&P Global Platts Analytics, WTI averaged $27.85/b, down $9.28 on the week; WTI Midland averaged $25.40/b, down $12.05; and Bakken Composite prices averaged $23.39/b, down $10.72.

For natural gas, Henry Hub prices averaged $1.82/MMBtu, unchanged, while at Dominion South, prices averaged $1.40/MMBtu, down 6 cents.

EVEN IF RUSSIA COOPERATES, OIL GLUT COULD PERSIST

If the Saudis and Russia "make nice," that could prevent further hemorrhaging of budgets, but there is still the "little" problem of an overwhelming global oil glut, Williams said.

"Cutting [hydraulic fracturing] crews will help some on expenses because completions account for about two-thirds of well costs nowadays," he said, "but at least completions add revenue in the form of production sold, which the market definitely doesn't need."

A rise in bankruptcies is likely to follow in the coming months, Williams and other analysts say.

"E&P capital spending is getting cut by up to 50% by most companies," veteran industry analyst Jim Wicklund of investment bank Stephens said in a Thursday investor note. "The litany of rigs being cut by operators is an ugly foreshadowing."

Wicklund noted the US oil and gas rig count recently had dropped 25% from its peak of "well over 1,000" at the end of 2018; Enverus estimates the peak at 1,237 in mid-November of that year.

"Now it is going to do that again and more," Wicklund said.

OIL RIGS DROP 20 THIS WEEK TO 667

In this week's rig count, oil rigs dropped by 20 to 667 while rigs chasing natural gas dropped by two to 146.

The Permian bore the brunt of shed rigs this week, falling 12 to 416.

The Eagle Ford Shale was the next-biggest area of rig decreases, down by three to 72.

Other large basins had one- or two-rig decreases, or held stable. None of the eight named large basins had increases.

Last week, the rig count decreased by only three, even though operators were beginning to make capex cuts. But since it takes time for rigs to finish current operations, cutbacks announced today may take some weeks to show up in the rig count. And at today's oil prices, producers need to keep paring down.

"Deep spending cuts across the board are needed to achieve cash flow neutrality at $35/b in 2020," said Roy Martin, from Wood Mackenzie's corporate analysis team.

"We calculate an average spending cut of 57% will be required for our [covered companies], if only upstream spend is targeted," Martin said. "A reduction of 41% would be needed across all spend categories, including dividends, to be cash flow neutral at $35/b."

That's the current situation, and returning to normalcy will take a while, even though the damage occurred very quickly, Williams said.

"Even if oil prices were restored, it will take months, maybe years, to unwind from all this damage to industry," he said. "If the most dire predictions about demand destruction come true, it will make the 1986 and 2015 busts seem like tea parties."