PRIMARY VISION INSIGHTS MONDAY 19 August, 2019
Seasonality and Activity in Shale
By Mark Rossano
Completion activity typically adjusts based on weather as freeze-offs or difficult conditions shift when wells are frac’ed in the short term. This was a bigger factor when more activity took place in seasonal areas, but as the shift has moved further South, weather relationships have been measured in days or weeks vs months. The holiday schedule can be a factor when realized oil prices are low, but if prices are elevated- work will continue. The focus of using a 4-week rolling average helps to normalize some of the blips that can be caused by weather related interruptions. The bigger driving issue, as highlighted by the data is (shockingly) realized prices- and the ever important- margin/revenue. If realized prices fall by $5 but costs fall $6, activity will remain strong going forward. The energy sector will remain under pressure, and the data highlight who is activity in the most lucrative areas for pricing and future growth.
The data highlights a lot of common talking points: the Permian and Eagle Ford will remain the growth engine through the next wave of completions. The Bakken will always have a place in the market provided the quality of crude, but completions will be focused around maintaining production and less about growth. This has resulted in a drop off in activity as the Williston entered “development” mode sooner than the south provided the maturity of the region. Halliburton remains very active in the Permian, and is experiencing a ramp in activity as the first of three pipes enters service. The Eagle Ford remains active provided the infrastructure that is currently in-place and the blending that remains active with Gulf of Mexico crude hitting the shore. Eagle Ford light-sweet is a perfect blend stock for the Gulf of Mexico heavy-sour, while the Permian doesn’t have the same optionality based on location and pipe restrictions driving the addition of a new benchmark- WTI Midland Light. This will trade at a discount to WTI Cushing and WTI Midland. Differentials- driven by location, quality, and access (pipe and export)- are a key factor for evaluating profitable activity, and is a pivotal for distinguishing E&Ps that have value in this market and others destined for bankruptcy or bought for pennies on the dollar.
Seasonality data won’t be as relevant going forward with the growth factor originating in New Mexico, Texas, and Louisiana that will experience freeze-offs but nothing as detrimental as the Canadian break-up season. This highlights the importance of the 4 week rolling average to identify- companies with rising spreads by basin and E&Ps. Seasonality will come into play closer to holidays, but it will be fleeting with blips created by extreme cold resulting in freeze-offs and hurricanes/rain impacting logistics. The data highlights the consistent drilling activity in the Permian, but as we get more granular there is specific information as to “who.” The Eagle Ford attracted more capital when the Permian reached a significant bottleneck, but as pipelines enter service capital has shifted back into the Permian. The adjustment has been measured as there was already oil behind pipe, so it won’t take many additional spreads to fill the pipe that has started to deliver to the coast (as reflected in completion crew seasonality chart below). The bigger issue will be the coastal bottleneck as docks and export capacity is 18-24 months behind pipelines at a minimum. As the world experiences a growing flood of light sweet crude, the longer-term problem will be competition in the floating market- which brings me full circle regarding costs. Maximizing efficiency and reducing all-in costs are pivotal in competing on the global stage. Earnings have done little to stem the tide of the stock price decline, and with the major headwinds in the macro environment and crude pricing- there is little to prop up pricing in the short term.
As a reiteration from a previous writing, Primary Vision has clearly shown the discrepancy between oil and gas, which is projected to continue at least into 4Q. Activity remains well off 2018 levels and resulted in multiple spreads/ equipment being stacked. The stacked equipment has been old equipment reaching the end of its useful life, which is cheaper to use for spare parts instead of overhauling or replacing in the current environment. Several of the large oilfield service companies have announced 2Q earnings that are moderate to disappointing with soft guidance going forward as active remains sluggish in NAM.
These declines are reflected across multiple basins and operators with only a select few shaking off the trend and seeing an increase in activity. XTO, Cimarex, and Energen are some examples of increases. Cimarex doesn’t have many options given their acreage position, while XTO is taking advantage of their integrated model. By taking equipment off the market, it has helped protect some pricing for companies such as Haliburton- but others haven’t fared so well- such as RPC. The data remains consistent that E&Ps that control more and more of the hydrocarbon life cycle will maintain drilling plans. These companies- such as XOM, CVX, PXD, COP, EOG- can take cost out from other parts of the supply chain as oilfield service pricing doesn’t have much left to give. This also leads to the bigger problem for smaller E&Ps- if XOM and CVX are able to make an additional $6 running light-sweet crude through their refiners- do they care if they lose a $1 at the well-head?
This isn’t the first downcycle in the energy space and it won’t be the last, but it has been long based on the shifting structural make-up of the market. The U.S. is now exporting light-sweet crude at levels never imagined, China is exporting refined products and growing, OPEC+ is facing a market share challenge, and global policy is impacting refined product movement/consumption all the while a global economy sputters to a halt. The structural and cyclical impacts are all hitting at the same time, and the guide through the turmoil will be data-oriented activity in order to achieve profitability and pick up the pieces that make money. Primary Vision will be able to stay ahead of the trend by evaluating any seasonal adjustments, 4-week average trends, and completion crew projections across the lower 48. The color will provide a guide for earnings power (utilization rates), production levels, and general trends for future growth.