Houston — The US oil and gas rig count dropped last week to an even 900, down 19, Enverus/DrillingInfo said Thursday, falling to the lowest total since mid-March 2017.
This decline comes on the eve of the quarterly conference call season that typically gives clues on forward E&P activity, which are particularly anticipated now amid a current cloudy outlook for crude prices.
The drop came almost totally from oil-directed rigs, which fell 18 to 724 this week. Gas-directed rigs remained steady at 171 on week, and there was a loss of one rig not classified as oil or gas.
The largest single change in rig counts came from the "Other Basins" category, which was down 9 rigs to 180. These are rigs that are generally in smaller or more-conventional basins often populated by private operators, which are more commodity-price sensitive.
Analysts usually don't give much credence to week-to-week swings in the rig count, which can be affected by any number of individual company decisions. But a further look at the numbers shows a large drop occurred in the Fort Worth, Texas, area, where rigs fell from 12 last week to six.
Among larger basins, the biggest changes in rig counts among the eight most prominent US plays came from the Permian Basin of West Texas/New Mexico and the SCOOP-STACK in Oklahoma. Both basins lost three rigs each, leaving totals of 409 in the Permian and 50 in the STACK.
The Dry Marcellus Shale, a largely gas basin mostly in Pennsylvania, lost two rigs, leaving 23.
Three other basins, the Haynesville Shale in northwest Louisiana/East Texas, the Williston in North Dakota/Montana, and the Denver-Julesburg in Colorado, lost one rig each. As a result, the Haynesville and the Williston now each have 55 rigs, while the D-J has 24.
Remaining steady week on week were the Eagle Ford shale in South Texas and the Wet Marcellus, also in Pennsylvania, at 70 and 17 rigs, respectively.
Consolidation was at the forefront of industry chatter this past week as aggressive mid-cap Permian Parsley Energy said it had agreed to acquire a smaller Permian peer Jagged Peak Energy for nearly $2.3 billion.
"As the E&P customer base continues to consolidate, we note that capex spending levels from the combined company tend to be lower than the stand-alone entity," Evercore ISI analyst James West said in a recent investor note.
The capital discipline E&P companies continue to demonstrate has changed the North American operating environment, West said.
"We have always expected that E&P companies would consolidate first, but we also thought we would have seen more small and midcap consolidating transactions in oilfield services at this point," West said.
"With expectations for further cuts in North American spending and rig count levels, the operating environment will not get any easier in 2020" for the latter sector, he said.
Persistently low oil prices that have not returned to anywhere near high double-digit to triple-digit levels of 2014 and earlier, are behind upstream companies' extreme conservatism in recent years.
Historically, after a period of sharp decreases in commodity prices, these rebound to former levels, after which E&P budgets increase and drilling activity rises. But world oil prices, which fell from levels over $100/b in mid-2014 to half those levels six months later, have never recuperated anywhere near former highs.
In 2018, WTI prices stayed around the $60s/b level (WTI) and even briefly reached the mid-$70s/b, while Brent was in the high $60s/b and $70s/b and was flirting with mid-$80s/b. But US unconventional production growth was larger than expected, while other geopolitical events suggested the world had a bounty of oil supplies with more on the way.
As a result, oil prices plunged late last year, and while they recovered some, they did not return to 2018 levels.
This has caused oil companies to rein in capital spending and, in turn, analysts expect more upstream consolidation, particularly among small-to-midcap operators.
This is already taking place, with two notable recent pending acquisitions: Callon Petroleum in July unveiled plans to buy Carrizo Oil & Gas for $3.2 billion, and PDC Energy said in August it would take out SRC Energy for $1.7 billion. Both are all-stock transactions expected to close before year-end.
The transactions will provide size and scope to the combined companies in big US unconventional basins, with opportunities for further efficiencies and cost-cutting. But capex will suffer, putting further pressure on an already squeezed service sector.
-- Starr Spencer, firstname.lastname@example.org
-- Edited by Jim Levesque, email@example.com