Rig Counts Respond to Rapid Recovery in WTI!

Defying all but the most optimistic forecasts, the US-based West Texas Intermediate prices have soared by 22% since ’20 closing price of $48.52.

This dramatic surge is attributed to optimism about an early wind-down of the pandemic-driven contractions and unexpected discipline on the parts of both OPEC+, and more surprisingly, the US shale industry centered here in the Permian.

Hence, growth rates in US-based production are way slower than compared to recent post-recession patterns. The upshot: Rig counts are up, but they have an awfully long way to go before they get near the frenzied levels of 2018 (and early 2019).

This lack of a fast rebound is said to reflect more “capital discipline” on the parts of producers and their suppliers.

Where Are Oil Prices Going?

That’s the $64,000 question! And, we don’t know the answer, but we know some smart people that have a pretty good grasp. Click below for two great insights into what to expect during this new year:

Do Rig Counts Tell Us Everything We Need to Know? – Part 3

Rig counts are a key statistic that indicates activity levels in the upstream oil & gas sector. And, we all know that it has plunged due to the unfortunate confluence of the O&G Recession and The Great Pandemic Recession. The following Table A lays out the severity of the rollbacks across the industry all the way through September.  And, Reeves County and the Delaware Basin were not spared.  In fact, they are down 88% year-over-year.  Brutal!

But the story is much more complex. For example, as shown in Table B, permits to drill wells, although down 50% from 2019, are still well in excess of 2016.

This ongoing level of activity is a positive sign that the commitment to the Reeves/Delaware Basin region is long-lasting. But very interestingly, completion activities are not off in the same proportions as drilling.

In fact, Table C (above) indicates that Reeves County’s completions (September) since January are “only” down by 44%.  In fact, until only very recently, this activity has been within the range established in early 2019.  Much better than the rig count!  This is an indicator that oil companies are much busier than the low rig count signals.

Indeed, Chevron’s pending acquisition of Noble Energy, a leading driller in the Pecos/Delaware Basin Region portends a more aggressive approach to all aspects of “activity”:  permits, drilling & completions.

Do Rig Counts Tell Us Everything We Need to Know?

Rig counts are key statistics to indicate activity levels in the upstream oil & gas sector. And, it has plunged thanks to the unfortunate confluence of the O&G Recession and the Great Pandemic Recession. The following Table lays out the severity of the rollbacks across the industry. And, Reeves County and the Delaware Basin were not spared.

As much as these statistics imply a race to zero, the story is much more complex. For example, permits to drill wells, although down 50% from 2019, are still well in excess of 2016. This is a sign that the commitment to the region is long-lasting. Ditto to the news of Chevron’s planned acquisition of Noble Energy, a leading driller in the Pecos/Delaware Region. Indeed, Noble, crippled by a heavy debt load, was like a wounded animal. And Chevron, large and financially muscular, was easily able to “devour” it. That means the new owner/developer of this world-class acreage will be able to be much more aggressive than the crippled predecessor.

“Bottom Line” is that permit levels are decent and Chevron’s takeover is a shot of adrenaline for the Pecos economy.

What Do Rig Counts Tell Us?

Any seasoned professional involved in upstream oil & gas activities knows the importance of rig counts.  Of course, the utility of this indicator has shifted over the years as the definition of a rig itself has undergone a metamorphosis; nevertheless, it remains a solid barometer that indicates levels of exploration and development.

Certainly in the Delaware, rig counts correlated with the dramatic emergence of this province as being an elite sector for oil & gas growth in the US.  The graph below charts the percentage gains since November 2015 of the Delaware versus the rest of the US.  It shows that the Delaware doubled in this period, while the country is effectively flat.

The Delaware is part of the famous Permian Basin.  The Permian also outpaced the United States, but not at quite the same blitzkrieg rate.  It is up “only” 80% in that time frame.

Interestingly, as the US itself has slowly peeled back by 21% since the beginning of 2019, the Delaware has also tracked it.  The Delaware continues to surge in production even though its rig count is down by a more modest 15%.  A key explanation is that the wells that are being completed are high-quality and the aggregate volume levels keep cumulating.  This phenomenon does not persist in lower quality oil basins.

So, what’s going on?  Stay tuned, we will have more to say in our March Report.

Jeffrey P. Price
First Keystone Pecos Industrial Park, L.P.
PO Box 2
709 Forest Grove Road
Wycombe, PA 18980
(215) 598-3000
 (267) 278-0557 (Mobile)