US rigs off 16% year-to-date

US rigs off 16% year-to-date 

Note from CanaccordGenuity

 Energy Estimates Revised  Deepening rig downturn

US rigs off 16% year-to-date

This year’s decline in US rigs is one of the fastest yet seen: since the peak at the end of September, onshore rigs active is down over 20%, with nearly all basins seeing substantial falls. In the week to 30 January the count fell 90 w/w, the fastest w/w drop in at least a decade, and marking eight straight weeks of decline. This pace of fall indicates current economics for the US onshore industry are poor, and we highlight sub-$3 natural gas as well as low oil prices.

Further cuts to our forecast…

We had thought the trough in US rigs would be 3Q: given the current rate of fall and our belief that liquid & gas production from shale is likely to stabilize rather than fall, we now see the trough at end 2Q, at around 1,175 rigs. This would be a c.40% peak-to-trough fall, significantly less than in previous cycles because of the very high underlying decline rate in current US production (4.5% per month) and the consequent need to maintain flow.
Less than half the total cost of production is in drilling, but much of the rest (processing) is now effectively “sunk” cost: and that process plant requires feedstock, which implies continued drilling (well construction) as well as completion. We estimate more than 850 rigs are required simply to maintain existing production in the Big 7 shales (Figure 2).
We now see an average US rig count for 2015 of 1,270, down 32% y/y, and around 10% less than our previous forecast.

…but impact on supply implies pricing improvement in 2H

We model production from the Big 7 US shales, illustrated on Figure 1 on page 2, based on the per-rig impact on existing producing wells and underlying decline for the basins as a whole. Monthly oil production decline from these wells is around 6.0% (gas is 3.5%) and as a result reductions in drilling activity should have a rapid and visible impact on supply. We now see stabilization in liquids production from these shales as soon as March. This stabilization, which would result in much reduced over-supply, lends credibility to the consensus view in the energy sector of a recovery in oil prices in the second half of this year.

Impact on stocks

Anecdotally the impact of these declines is less on production than might be expected: numerous companies are indicating that despite reducing their rigs on hire, they will still see production stability or even growth, because of completion of existing wells and increasing capacity of the rigs that remain active. As a result, we are not making any further downgrades to our earnings forecasts for the European oil services.

Alex Brooks, CFA  Canaccord Genuity Limited (UK)