The State Of The U.S. Oil And Gas Industry Is Strong As 2017 Comes To A Close

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Now that Christmas has come and gone, and my stomach somehow remains full from all the pecan pie and sweet potatoes I filled it with on Monday, it is time to take a look back at the events of 2017 and assess the status of the domestic oil and gas industry as the year comes to a close.  To paraphrase a standard line that every U.S. president uses in every annual state of the union message, the state of the industry as 2017 comes to a close is strong.

Yes, “strong” is a good word for it.  As in, surprisingly strong, unexpectedly strong, stronger than the industry had any right to realistically hope for as the year dawned 12 months ago.  Let’s look at some of the reasons why that is the case:

• The OPEC/Russia Export Limitation Deal has been a rousing success – Yes, ok, I know this is supposed to be about the domestic industry, but the truth is that the current healthy state of the U.S. industry has been directly impacted by the success of this agreement.  Think back 13 months ago, when OPEC, Russia and the other non-OPEC nations announced this agreement:  What was their stated target price for international crude?  If you said “$65 per barrel,” you would be correct.  As I write this piece on December 26, the Brent price is trading at just above $66/bbl.  Others can quibble about the details of this deal, whether each individual country is cheating on its quota, all the other factors that go into determining the price for crude on any given day, but when your deal has, after 13 months, pretty much nailed its target outcome, that is unarguably a resounding success.

• The WTI price is approaching $60/bbl – this measure is more directly relevant to U.S. crude production, and, after falling to ~$43 at mid-year, has risen about 38% from that low point.  A stronger crude price pretty much always improves the health of the oil and gas industry.  Much of this is due to the OPEC/Russia deal, but much of it is also because…

• The U.S. industry responded to price fluctuations pretty much exactly as predicted a year ago – In my year-end predictions piece from a year ago, I projected that, in reaction to the comparatively high prices that existed at the end of 2016, the U.S. industry would “activate another ~ 200  drilling rigs during the first four months of 2017.”  U.S. producers actually activated almost 300 additional rigs during that 4-month period.  I further predicted that “[t]he likely result will be higher price volatility and a probable resulting fall-back to prices in the high- or even mid-40s.”  As mentioned above, the price actually dropped all the way to ~$43/bbl.  But, as expected, U.S. shale drillers then responded to that lower price by scaling back their drilling during the 2nd half of 2016, helping the price to rebound to its current, healthier level.  They will respond to this higher price by once again ramping up their drilling budgets for the first half of 2018, a factor that I will discuss in detail in my 2018 predictions piece next week.

• Natural gas prices are stagnant. – Again, no surprise here at all, and no real relief in sight.  The price for natural gas is closing 2017 at its low point for the year, a full dollar per mmbtu lower than a year ago.  The price hovered slightly above to slightly below the $3/mmbtu mark throughout the year, and given that the U.S. is just overwhelmed with such massive untapped natural gas reserves, there is little hope for breaking out of this paradigm anytime in the near future.  To borrow an annoying bit of conventional wisdom, it is what it is.

• Natural gas demand is growing rapidly. –Natural gas has been and will continue to be the fuel of choice to replace the preponderance of the nation’s retiring coal-fired power plants.  The ongoing low price situation for the commodity has also resulted in a massive investment boom in new manufacturing capacity for products that use natural gas as a feed stock.  Unfortunately for natural gas producers hoping for stronger prices, the easy access to massive additional supply continues to overwhelm the rising demand.

• LNG export volumes are about to rise dramatically. – With Dominion’s Cove Point export facility joining Cheniere Energy’s Sabine pass facility in the LNG exporting business, export volumes began to rise in the 4th quarter of 2017.  With several more export terminals planned to come online over the next two years, this aspect of the natural gas business is poised for a boom.

• Crude oil exports are exploding. –  Ok, that’s bad imagery.  Let’s say they are “rapidly growing” instead.  When the 1970s-era ban on most U.S. crude oil exports was repealed at the end of 2015, the U.S. was exporting roughly 400,000 barrels of oil per day through the Commerce Department’s permitting process.  Thanks to that repeal and an expansion of export capacity at the Port of Corpus Christi and other U.S. ports, domestic producers were exporting over 1.7 million barrels of crude per day at the end of October.

• Public policy has moved in the industry’s direction. – The Trump Administration has been more aggressive than even I had anticipated it would be in rolling back some of the heavy-handed regulations that had been implemented by the Obama Administration during its final days.  This reality and the virtual lack of any new regulatory initiatives out of the EPA or Department of Interior has freed up more company resources to focus on getting the actual business of exploring for oil and gas done.  Add to that the benefits that will accrue to the oil and gas industry via the new tax laws that take effect on January 1, 2018, and you have a vastly improved public policy environment for this industry. What a change from the prior 8 years, every one of which began with a sitting President proposing to repeal every tax treatment relevant to the industry in the tax code.

• Company profitability is significantly improved. – Unsurprisingly, this atmosphere of higher commodity prices, lower regulatory costs, rising demand and expanding exports of domestic production have all combined to create a more profitable environment for the nation’s oil and gas industry.  This happy situation has come about just in time for corporate management teams who have found themselves under increasing pressure to increase their returns to investors.

All things considered, 2017 produced a veritable sea-change in the outlook for the U.S. oil and gas industry, a true turnaround from the bleak years of 2014-16.  While it’s not a return to the heady days of $100 oil or $12 natural gas – two things we are unlikely to see again for a generation, perhaps ever – the relative health of the industry today as compared to a year before is dramatically improved, and really more than any industry participant could have reasonably hoped for.

SOURCE: Forbes contributor David Blackmon ,