Tonight we returned from a three day trip to Midland. The trip was prompted by a series of industry discussions during the past week in which we learned of anecdotes of companies potentially going back to work sooner-rather-than-later. To confirm the validity of these anecdotes, we drove to Midland to visit with E&P and OFS contacts. The collective feedback, along with visual observations, suggest activity is on the mend.
Frac Crews Returning to Work. As a reminder, in prior notes we cited anecdotes of private E&P’s potentially picking up crews in June with some in July. Specifically, we heard as many as three private E&P’s would add crews in June/July while we also learned of two vertical completion jobs going on the Board this month in the Mid-Con. This week we were made aware of additional activity increases as some E&P’s bring forward activity. For example, one private E&P recently picked up a crew to complete one well for lease retention purposes while another E&P will pick up a crew next week. The second E&P will likely add an additional crew in June/July as well. Meanwhile, industry contacts report one large E&P which had discussed picking up activity in Q4 may now pick up a crew in June/July. Another E&P is likely to be adding two crews in Oklahoma in July. Admittedly these are small numbers but when the industry is so far in the abyss, any improvement is welcome.
To be fair, not all of the E&P’s with whom we visited are looking to add crews right away. One claims it will remain committed to its discipline and won’t add crews until January 2021 while a second has no plans to resume completion activity this year. Other E&P’s confirmed they will resume activity but will stick with the original plan to bring back equipment in the August/September timeframe. One consistent theme, however, is the internal discussion regarding crew availability. There are those who are assessing the merits of bringing back activity sooner-rather-than-later in order to capture lower service costs. Also, most E&P’s admit they didn’t believe WTI prices would be above $30/bbl so quickly. The speed of the price improvement is influencing the internal discussions.
How many crews go back in the Permian? We asked this question in most of our E&P meetings. The consensus view is the Permian frac crew count is roughly ~20 fleets today. Those willing to offer their respective prophesies see the Permian crew count at ~50 by year end and rising further in 2021. We believe the count will be higher than ~50 if the strip stays in the mid-$30’s. No one believes the Permian will return to peak activity levels.
Bringing Wells Back Online: Several E&P’s acknowledge they have started bringing wells back on line. Seems a bit early to us. Many E&P contacts wonder what will happen to production on the HZ wells with some believing the shut-in’s could result in reduced production. Most contacts have never had to shut-in a HZ well before so the production impact is still a bit of an unknown. One E&P who brought three HZ wells back recently reports two of the wells quickly returned to pre-shut-in production levels, but the third is having water issues thus a production impact. A small sample, but this will be a question for E&P’s in June/July as we kick off Q2 update season. At that point, more HZ wells will likely be back online and we’ll know what, if any, impact there is.
Visible Signs of Improved Activity: We were in Midland three weeks ago and wrote about the lack of well service rigs operating. Specifically, we cited our drive from Midland to Denver City to Canadian where we saw zero working rigs. This trip we didn’t do as much driving, but we passed two rigs just north/west of the airport and then saw additional working rigs both north and south of 191 between the airport and Midland. These rigs weren’t there three weeks ago. Also, while not an apples-to-apples comparison, this week we drove through Sonora, Ozona, Big Lake and Rankin. We did not hit those towns three weeks ago. Multiple rigs were working and perhaps they were working there three weeks ago as well. Nevertheless, it was encouraging to see working equipment.
Hotel Occupancy. We stayed at the Doubletree this trip. $160/night. We asked the front desk about occupancy and learned we were one of 20 rooms occupied during our stay. The hotel has 260 rooms. We probably could have negotiated a better rate, but when we learned the hotel had let go/furloughed nearly 100 staff members, we didn’t gripe about the price. Meanwhile, we did see a reasonably busy dinner crowd at the Wall Street Bar and Grill and Bob was working the bar. Venezia was similarly pretty full on Monday night. Not many mask wearers in Midland/Odessa. Plenty in the Austin area.
The “Roll” – We learned a new term this week called the “Roll”. This concept is used in determining the price at the lease. It is a bit confusing, but thankfully, there is a late April article in the Midland Telegram Reporter written by Michael Banschbach which helps explain the concept. Per the article, the “roll” is a way to normalize the selling of physical barrels in one month based on futures prices for the next two months. It is a mathematical calculation based on trading days, but the roll plays into the net price calculation. Other factors which influence the price are the Midland/Cushing basis as well as the truck transport cost. We encourage folks to read the article.
For the month of May, the roll is roughly $11/bbl according to one E&P contact. Factor in the Mid-Cush basis and trucking costs and the realized cost is about a $15-$16 discount to WTI. We presume most midstream sell-side analysts should know this concept, but for someone who has spent their career in OFS, this was new to us. We’ve probably butchered the explanation, so go read the article (title is Oil Economics 101: Here’s taking the mystery out of crude pricing). What did give us some comfort is the “Roll” was a term even some of the most seasoned E&P execs we met with had never heard of before. Why? According to them, the Roll has historically been very small, but given the blowout in crude prices in April, everyone is now aware of the concept as the Roll will take a big chunk out of realized prices. For the month of June, the Roll will moderate to about $2/bbl according to our contacts.
Crude Marketers & Allocations. When the market collapsed and the E&P community went into shut-down mode, many of the E&P’s failed to live up to their allocations. Consequently, crude oil marketers have been calling around looking for crude. This surprised us as we were under the impression storage was filling up and no more crude was needed. Given E&P’s failure to live up to allocations in May, we are told the crude oil marketers will be more heavy handed on a go forward basis and will hold people accountable to their allocations. For some of our E&P friends who had access to crude in storage tanks, they were able to sell crude to the marketers at a favorable price with one claiming a price close to WTI.