Highlights

Permian rigs up by one to 486, highest since January 2015

In Q2, capex guidance rose more than production guidance

‘Vast majority’ of oil growth largely weighted to H2: Evercore



Houston —
The US oil rig count stayed flat on Friday at 869, following a 10-rig jump the previous week, as operators face challenges to provide production growth while keeping capital spending in check.

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The latest report by Baker Hughes shows the rig count is still the highest it has been since early March 2015, when numbers dropped in response to oil prices that had fallen to about half their mid-2014 levels above $100/b.

The much-watched Permian Basin, the most active in the US, crept up by one oil rig to 486–the highest rig count there since January 2015.

Oil production in the West Texas/southeast New Mexico basin grew at a double-digit clip of more than 30% last year and is likely to grow again this year, albeit at a lower rate.

Permian production growth has slowed owing to takeaway capacity that appears to be brushing up against its roughly 3.7 million b/d limit.

The basin’s current oil production is 3.387 million b/d, according to S&P Global Platts Analytics forecast. Platts sees production rising slightly to 3.434 million b/d by year-end after beginning 2018 at 2.822 million b/d. Oil output should gradually reach 4.307 million b/d by year-end 2019.

TAKEAWAY MOSTLY RESOLVED FOR LARGER PRODUCERS

The recent round of Q2 earnings conference calls suggests a majority of large and mid-cap upstream providers have mostly resolved their takeaway issues.

Many secured enough takeaway capacity early, while others are in the process of filling gaps, often through creative deals. A handful have shifted capital away from the basin into other plays or continue to drill and not complete wells, banking them for future finish.

But a need has appeared for more funding than the thoughtful, comfortable capital budgets E&P companies mapped out early this year. Higher oil prices coupled with drilling and completion efficiencies achieved in recent years have enabled moderate output growth while fully or largely funding shareholder dividends and operations.

“Producers were careful to explain that the added spending would be earmarked for high-return projects and accelerating 2019 activity, but most also admitted that cost inflation was a factor,” according to a Platts’ “PIRA Tight Oil Operator Review.”

Looking over Q2 results, boutique investment bank Evercore ISI noted about half of its 29-company coverage universe of large and mid-cap North American E&P independents increased 2018 capital budgets by an average of 10% but increased full-year total production guidance less than 2%, while none lowered capex.

In total, Evercore’s 29 companies raised capex guidance around 5% to $53.5 billion but left total 2018 production guidance more or less unchanged at a combined 7.5 million b/d of oil equivalent.

Moreover, the “vast majority” of this year’s oil volume growth, more than 80%, for the group is weighted to H2 2018, Evercore analyst Stephen Richardson wrote in a recent investor note.

COSTS RISE WITH HIGHER OIL PRICES

“Upward pressure on capital budgets is the result of a significant shift in the operating environment plus commodity price expectations since Q4 2017 when budgets were set,” Richardson said. “Inflation is cycling through the cost structure as producers point to labor, input costs (namely steel) and energy as driving costs higher.”

“Industry is clearly challenged to deliver on both volume growth … and hold the line on perceived capital discipline concurrently,” he said.

Platts analysts found oil production grew 9% quarter on quarter during Q2, driven by a relatively high rig count growth of 10%.

“Most operators reiterated prior production guidance for 2018 with a few modestly increasing it,” such as Anadarko Petroleum, Devon Energy, Marathon Oil and Occidental Petroleum, the Platts report said.

Guidance revisions point “toward larger percentage increase in capex versus production,” the report said.

Rig count guidance largely was flat for H2, and several large operators reported cost increases for drilling as day rates trend up, Platts said.

–Starr Spencer, starr.spencer@spglobal.com

–Edited by Jim Levesque, newsdesk@spglobal.com

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