By: Starr Spencer – S&P Global Platts – The US oil and gas rig count jumped climbed 12 to 442 in the week ended Jan. 27, Enverus data showed, with the double-digit jump likely telegraphing a changing mindset stemming from higher oil prices.
“Overall, another strong week for US rigs, as operators are likely starting to see a mid-$50/b price in 2021 as a possibility, which would allow for most of the drilled-but-uncompleted wells to be profitable in major crude plays and a large portion of new wells to be able to breakeven,” said Andrew Cooper, quantitative analyst with S&P Global Platts Analytics’ Global Supply Team.
“However, a strong rig ramp of 20 rigs a week is unlikely without $60/b WTI,” Cooper said.
For the week ended Jan. 27, oil prices were slightly lower. WTI prices averaged $52.71/b, down 33 cents, while WTI Midland averaged $53.63/b, down 28 cents, and the Bakken Composite price averaged $49.68/b, down 42 cents.
Natural gas prices were also slightly weaker, with Henry Hub averaging $2.55/MMBtu and Dominion South averaging $2.25/MMBtu, both down 8 cents.
The nationwide rig count, now its highest since April 2020, has grown by 36, or 8.9%, in the past three weeks.
Oil rigs were up eight on week to 326, while gas rigs were up four to 116.
In April-May 2020, rig totals plummeted from an oil price collapse as the pandemic hit oil demand. The rig count has since recovered 58% from the early July trough of 279 but it is still below the 838 domestic rigs active in early March 2020.
Permian rig count rises
The largest weekly change in rigs came in the Permian Basin of West Texas/New Mexico, where seven rigs were added to 201, marking the highest total the basin has seen since May 2020.
“The Permian trend continues to hold, as this week more rigs (six) were added to the gas-rich Delaware side compared to the Midland (three), likely with the majors leading the charge in their Delaware New Mexico acreage,” Cooper said.
In the past four weeks, Permian rig totals have increased by 19, or 10.4%, from 182 at the end of 2020.
Rigs in the Eagle Ford Shale of South Texas were up four week on week to 32.
The DJ Basin (nine rigs) of Colorado; the SCOOP-STACK (16) play of Oklahoma; and the gas-prone Haynesville Shale (49) of East Texas and Northwest Louisiana all gained one rig apiece.
The natural gas-prone Marcellus Shale (34), mostly in Pennsylvania, and the Utica Shale (eight), largely in Ohio, also kept their rig counts steady week on week.
There were no weekly changes in rig count to the oily Bakken Shale, where totals have remained at 13 for three consecutive weeks.
A flat 2021 expected
Fourth-quarter 2020 earnings calls kicked off this week with Hess and Murphy Oil signaling basically flat capital spending and production in 2021. Even though WTI oil prices are above $50/b, and many think they could stabilize in the mid-$50s/b later this year, most operators will likely take a “cautious” approach toward 2021 CAPEX, Wells Fargo analyst Nitin Kumar said.
“The base case for many [is] built around maintaining flat oil volumes from Q4 2020 under a roughly $40/b-45/b oil price assumption,” Kumar said in a Jan. 28 investor note. “Recent strength in the futures strip due to an improving macro outlook and some accommodative OPEC+ actions will be used to increase ‘excess’ cash generation” – i.e., free cash flow.
Even with the likelihood of more restrictive oil and gas drilling and leasing policies of the new presidential administration of Joe Biden,” the bark seems to be worse than the bite,” he said.
“With Q4 2020, we think E&Ps will showcase their ability to generate cash, and as the year goes on investors will recognize that the risk-reward is still favorable.”
Investment bank Tudor Pickering Holt anticipates a “fairly sleepy quarter” for Q4 results and 2021 guidance.
“That is a good thing as investors continue to worry the industry will break ranks from its commitment towards capital discipline given the improvement in crude prices,” TPH said in a Jan. 26 investor note.
“Our catch-up calls with [covered E&Ps] suggest that concerns on this front should be put to rest this quarter, as the industry is committed to maintaining a cap on growth in 2021 with the intention to use free cash flow generation to pay down debt or accelerate shareholder returns,” the bank said.
