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US oil and gas rig count drops 11 to 1,127, ninth consecutive week of drops

Highlights

Ninth consecutive week of falling rig count

Losses all come from oil rigs

Potential for further activity declines: Platts analyst

Houston — The US oil and rig count dropped by 11 to 1,127, the ninth consecutive week of decreases as oil prices continued to hover in the low $50s/b, S&P Global Platts Analytics said Thursday.

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The losses all came from oil-directed rigs, which fell 11 to 886, while gas-oriented rigs were unchanged at 220, Platts data for the week ended January 16 showed.

The typical two- to three-month lag between oil prices and rig activity may have now caught up with the domestic rig count, as oil prices began falling from levels in the mid-$70s/b in October. On Wednesday, NYMEX WTI settled at $52.31/b, up 20 cents.

Overall, "I do think there is the potential for further declines in US rig activity, especially in areas where we haven't seen as much as of a response," S&P Global Platts Analytics analyst Taylor Cavey said. "If oil prices climb, however, I think the declines will be muted."

Click here for full-size graphic

Rig counts also fell in most of the eight large domestic marquee plays, although the Permian appeared to be the featured exception in gaining three rigs to 481. The Permian in now down 18 rigs since its recent peak of 499 in mid-November.

The Haynesville Shale, chiefly a dry gas play in East Texas and Northwest Louisiana, was up one rig to 63.

But the DJ Basin in Colorado was down four rigs to 32, while the Eagle Ford Shale in South Texas and the SCOOP/STACK play in Oklahoma were each down three rigs in the past week to 88 and 103, respectively.

The Marcellus Shale, mostly sited in Pennsylvania, was down two rigs to 60, while the Utica Shale largely in Ohio was down one rig to 16.

EAGLE FORD HAD LONGEST RIG DECLINE STREAK

The Eagle Ford has showed the longest streak of rig declines in the last several weeks - a total of 13 from 101 rigs in the first week of December, Cavey said.

Prior to October of 2018, all signs pointed towards production growth in the Eagle Ford as WTI crude prices reached their highest since late 2014 at roughly $75/b, he said in a written analysis in Platts' January Southeast/Gulf Oil and Gas Production Monitor. At the same time, shale production in that basin managed to grow a bit, reaching 1.37 million b/d in December 2018, 100,000 b/d higher than the prior year's exit rate.

"While there are certainly pockets in the Eagle Ford that are productive in today's price environment, $50/b is somewhat of a psychological threshold for the majority of operators in the basin as it warrants new development, but at the cost of lower revenue," Cavey said. "The half-cycle internal rate of return for a typical well in the Eagle Ford is currently 27%."

That means the average producer is making money, but their margins have become increasingly slim with IRRs dropping nearly 33 percentage points since October of last year, he added.

"As a result, shale oil production in the Eagle Ford is forecast to remain largely flat and grow merely 32,000 b/d exit-to-exit in 2019," Cavey said.

WTI is off recent bottoms in the mid-$40s/b during the last week of December.

Platts' prices showed the US' benchmark crude price averaged $51.82/b for the week ended January 16, up $2.68, while WTI Midland averaged $47.18/b, up $4.02.

That same week, the Bakken Composite price averaged $50.84/b, up $2.33.

For gas, the Henry Hub price averaged $3.26/MMbtu, up 48 cents, while the Dominion South price averaged $3.06/MMbtu, up 54 cents.

In addition, the number of US permits issued this week was up 180 to 1,945, Platts data showed.

Biggest weekly positive changes were in the Eagle Ford Shale, up by 32 to 81 permits issued, and the SCOOP/STACK, up by 12 to 49 permits issued.

The largest negative change was in the DJ Basin, down by 64 permits from last week, with 136 issued. The Haynesville was down 22 from the previous week with 17 permits issued. The Marcellus was up 10 to 48 and the Permian was up five to 194.

-- Starr Spencer, starr.spencer@spglobal.com

-- Edited by Jim Levesque, newsdesk@spglobal.com