- Top 4 encountered a decline of 40%
- Will recent stabilization of prices increase the rig demand?
The global oil and gas prices witnessed a significant downward pressure in the past couple of years with both the commodities weighing down by a persistent increase in supply. A higher than normal growth in output coupled with stable to low growth demand pushed the commodities into a surplus situation and thus, upset their prices.
In Televisory’s earlier blog on the ‘oil and gas segment’, the analysis was based on the demand-supply dynamics for the two major fossil fuels. Secondly, it also detailed the impact of continual low-prices on operations and profitability for the dominant players in the United States and internationally. In the present blog, Televisory evaluated the effect of low prices of these commodities on rig operations in the sector, particularly relating to the United States.
Furthermore, as stated in the previous blog, an excess supply pushed down the NYMEX oil and natural gas prices during late 2014. The outcome of this on rig counts (total number of rigs involved in the exploration of oil and gas) was seen as a lag in the last few weeks of 2014, while the same recorded a further downfall during the following quarters. The rig count which was at a high of around 1,930 counts (September 2014) registered a Y-0-Y decline of 56% and reached a level of 830 counts (end of September 2015). According to the monthly average, the oil prices fell nearly 6.5% (2014), while natural gas managed to end the year on a positive note. However, there was a price drop of roughly 50% for both the commodities in 2015.
Moreover, as per the Baker Hughes data, the oil and gas rig counts in the US fell almost by 62% (2015). The oil rigs registered one of the worst performances in the present decade following an unprecedented week on week decline in rig counts, continuing for 29 weeks and lasting up to June 2015. These rigs fell from close to a count of 1,500 (April 2014) to 320 (May 2016). This fall persisted in the initial half of 2016, but, there was an upward movement to a level of 750 counts (by August 2017).
Further, gas rigs too more than halved to approx. 160 counts by the end of 2015. These reached a low of 80 counts in August 2016.
The NYMEX crude prices were in the range of $45-50 per barrel since April 2016. The stability in prices resulted in an increase in the rig count from 420 (April 2016) to 940 (August 2017).
In spite of rig counts slipping significantly in 2015 and during the initial half of 2016, the oil production saw a healthy increase in 2015, whereas in 2016 the output was marginally negative. The US crude oil production grossly witnessed a 7.5% increase (2015), which translates to 9.4 MBPD (Million Barrels Per Day), while the output stood at 8.9 MBPD (2016). The production volume again increased to 9.11 MBPD during the 8 months of 2017. In addition, for natural gas, the total marketed production rose by 4.6% (2015) or 78.7 BCFPD (Billion Cubic Feet Per Day), while the output slid by 1.8% or 77.3 BCFPD (2016). Further, the output in the first 8 months of 2017 was 77.5 BCFPD and was nearly equal to 2016 level.
Notably, the major oil and gas producers took the brunt of low commodity prices, these firms worked backwards by rationalizing costs and increasing efficiency at all levels of production and exploration. Thus, based on the production figures for the two fuels, Televisory is of the opinion that the huge cut in rig count couldn’t significantly impact the output. Hence, cues from the major players in the US rig industry, the technological advancements, especially backed by a combination of horizontal rigs as well as fracking supported the productivity in rigs. The key players streamlined operations to enhance well drilling rate, while simultaneously worked on implied drill time (days spent per well) in the past quarters. The average implied drill time reduced from ~23 days (2014) to ~18-19 (2015 and 2016). Similarly, this further declined to ~16 days (first 9 months of 2017).
Consequently, as stated, while the overall drop in rig counts did not impact the production numbers severely, though the revenue and margins for rig operators did decline sharply. According to the data of Schlumberger, Halliburton, Baker Hughes and Weatherford, the top 4 oilfield services operators in the US and around the globe experienced a slump in revenues by an average of 40% in 2015 and 2016. On the other hand, margins declined at an even higher rate as the total number of rigs under operation fell, while end users (producers and explorers) negotiated price cutbacks in a rig and other oilfield services. But, the positive development was the revenue per rig count registered a growth of 9% and 11% (2015 and 2016), when rig counts were decreasing.
The oil prices have moderately stabilized after a big drop in the past few years, the major producers in the US are planning to enhance the output in slow, but linear manner. Likewise, the latest oil and gas production forecast from the US EIA is for a higher output for both these commodities in 2017 and 2018.
Therefore, the overall developments in the sector, especially in the past 2 to 3 years did hit the operators with a lower demand from producers and explorers, this led to a reduction in the total number of rigs under operations. However, all these occurrences were positive for the industry as market conditions were demanding and this raised efficiencies for companies, which lead to a better management of rig services, improved rig productivity (wells drilled/rig) and reduced working time (implied drill time). Although there are short-term challenges, the silver lining is the recent stabilization of oil prices, which is here to stay, this would gradually lead to an increase in rig demand from producers, eventually turning the fortunes for oil and gas rig market in the US.
Also read : - Canadian oil sand, corporate exits, is this the end for the industry?