Source: RigData The Land Rig Newsletter, July 2019
Bob Williams, Director of Content, RigData
US land operators have throttled back the number of new wells spudded in the second quarter after a promising surge in the first quarter of 2019.
The decrease followed a roughly 30% drop in oil prices in the fourth quarter of 2018. Operators also pulled back the number of active rigs by 7% from 4Q 2018 to 2Q 2019.
And yet, despite the retrenchment, there were signs that an emphasis on drilling efficiency—as measured by the average number of wells drilled per rig—still held sway.
Meanwhile, the Energy Information Administration, in its latest Short Term Energy Outlook, predicts a surge in oil production this year to record levels.
The upshot is that the recent focus on operators’ capital discipline, wherein many companies cut back 2019 drilling budgets in the face of sharply lower
oil prices at the end of last year, isn’t entirely being borne out in the numbers in 2019.
And it raises the question of operators—despite their best efforts—becoming victims of their own success again.
Pullback in 2Q
RigData estimates that US onshore operators spudded 5,067 new wells in 2Q 2019 vs. 5,843 new wells in 1Q 2019, or a 2019 quarterly average to date of 5,455.
That compares with a quarterly average in 2018 of 5,115 wells.
The average quarterly rig count fell to 993 in 2Q 2019 from 1,041 in 1Q 2019. The average tally in 2018 was 1,058.
Operators have drilled a remarkably consistent average number of wells per rig each year from 2013, the first year RigData began tracking this quarterly well count. But a recalibration of drilling budgets to focus on
high-grading wells to garner the best return saw the average number of wells per rig drop in 2017 and 2018. Operators reduced the number of wells per rig by 7.8% in 2017–2018 from 2016.
Extrapolating 2019 quarterly results to the full year, RigData estimates operators will have drilled 18.4 wells per rig in Q1 and 20.4 wells per rig in Q2.
That dovetails with capital spending plans for 2019, which Raymond James & Associates pegged at a year-over-year decrease of 9%.
“Capital discipline across the industry is not just lip service—it is for real,” Raymond James analysts said in their annual survey of capital spending plans.
Concho Resources, a key producer in the Permian Basin, for example, recently reduced its capex guidance for 2019 from $3.4–3.6 billion at the first of the year to $2.8–3.0 billion. In a statement made at its first quarter 2019 earnings call, Concho noted that “this is a cyclical commodity business” and that it plans “around conservative price expectations
Consolidating the two quarters and extrapolating their results to the full year, RigData projects that the well count will rise slightly in 2019 to 21,820—a 3.7% increase. That compares with year-over-year increases of 21% in 2018 and 69% in 2017—rebuilding years from the worst downturn in a generation.
Despite the flattening well count results in 2019 and the more circumspect attitude of operators, the EIA forecasts US crude production will average 12.4 million b/d this year and 13.3 million b/d in 2020, up from 11 million b/d in 2018. The agency also foresees a relatively flat 91.3 Bcfd natural gas production this year and 92.7 Bcfd in 2020.
The EIA thinks the increases in production will come largely come from the Permian Basin, which has rapidly built up its inventory of drilled but uncompleted wells (DUCs) in the past few years as it seeks to overcome bottlenecks in infrastructure. It now accounts for about half the DUCs in the country.
Given the recent shift in focus on capital restraint and, simultaneously, growth by an increasingly bipolar Wall Street and private equity, we’re likely to see the Permian DUC inventory whittled down, thus resulting in fewer new wells drilled but production growth that doesn’t square with current projections of demand.
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