Better late than never.
Daniel Energy Partners had the joys of driving our daughter’s car to the Northeast last week for college; attending our son’s delayed high school graduation in Virginia on Saturday and then making a surprise trip to North Carolina to see the parents on Saturday evening; thus we failed in our duties to properly and timely report interesting energy observations late last week and over the weekend. Consequently, we are now in catch up mode and will publish a couple missives this week. The first set of observations are land drilling takeaways from E&P conference call season as well as a few anecdotes from both public and private land drillers. We will convey a similar set of observations on U.S. frac activity later tomorrow.
Increased family time is one blessing of COVID. On this point, our son’s college experience is now delayed as the University of Virginia does not commence school until mid-September. Therefore, in celebration of more family time and to make up for a potentially lost college football season, the father/son team will head to Midland next Monday for two days of meetings. If you will be in Midland/Odessa next week and game for a visit, please let us know. Free baseball caps always appreciated…particularly as our college intern advocates the industry at the University level.
Also, Be On The Lookout for:
- DEP will soon transition to a new research distribution system. I’ve tried to delay this as long as possible, but my astute DEP colleagues want me to professionalize the DEP look. Apologies in advance if we have any IT snafu’s.
- The Daniel Energy Partners 2021 Event Calendar is being finalized. We intend to host best-in-class industry networking and conference events next year for our subscribers. You’ll want to attend.
E&P Land Rig Observations: We have reviewed transcripts, IR slides and press releases for 34 E&P companies. The following is a snapshot of observations as it relates to these companies’ respective land rig activity comments. In many cases, E&P’s failed to provide specificity on working and/or future rig count needs, but for those who are unafraid to provide a modicum of granularity, we list their observations below. The net change for this group during 2H’20 is essentially flat as a number of companies will modestly increase/resume drilling activity while at least one large player is likely to drop 15+ rigs from its Q2 exit rate. Presumably some of those releases have already occurred.
What gives us hope are offline comments from E&P contacts and/or subtle references to 2021. Specifically, we know some E&P companies who slashed and burned their rig counts to zero. Those companies acknowledge rig additions in early 2021 are a high probability. In one case, an E&P at zero rigs will likely add two rigs. In another case, a multi-basin E&P is potentially going to ramp 4-5 rigs in Q1 from nothing today. Meanwhile, there is another basket of E&P’s who have shuttered operations due to low commodity prices and/or budget shortfalls who reference front-end loaded budgets. We saw this with a few Marcellus/Utica players in 2020, thus we assume front-end loading occurs again in 2021. This means a jump in activity. With oil prices hovering in the low-to-mid $40’s, this activity jump feels like a reasonable assumption.
Lastly, there is a growing list of bankrupt E&P’s. Many of them have no rigs or completion crews running. Private land drillers express a view some of these E&P’s will resume some activity once the financial situation becomes more clear. We believe these opinions are derived from conversations with the E&P’s. If this occurs, it is yet another reason for a potential activity uplift.
E&P Data Points:
|APA||Zero rigs running. No plans to add rigs until oil prices recover into the $50’s.|
|AR||Running one rig. Appears no change to this level during 2H’20.|
|BCEI||No discussion of rig activity.|
|BRY||Will recommence drilling with one rig in October.|
|CDEV||Will add a rig in Q4|
|CLR||We believe CLR is at 6 rigs and may drop one.|
|CNX||Operating one rig with plans to stay at one rig through 2021|
|COP||Running 7 rigs and maintaining this activity through YE (4 Eagle Ford, 2 Bakken, 1 Permian)|
|CPE||Not running any rigs today, but plans to add 2-3 rigs this year.|
|CRK||Running 5 rigs with plans to add one rig later this year, had bottomed at 4 rigs.|
|CVX||Running 4 rigs. No discussion of rig trajectory.|
|CXO||Averaged 11 crews in Q2 with plans to average 8 rigs in 2H’20.|
|DVN||Running 9 rigs, down from 15. No discussion of 2H’20 rig activity.|
|EOG||Running 6 rigs. Maintenance capex plan would necessitate ~20 rigs.|
|EQT||Intends to run 2-3 HZ rigs this year. Running 3 HZ rigs today.|
|ERF||Zero rigs running. Will resume drilling operations in 2021.|
|ESTE||No plans to drill in 2H’20.|
|FANG||Running 6 rigs with an expected range of 5-6 rigs during 2H’20.|
|HES||Running one rig and likely stays at this level until $50 WTI.|
|LPI||Will maintain 1 rig in 2H’20, down from 4 rigs in Q1.|
|MRO||Running 3 rigs, previously had dropped to zero. Likely adds one rig in 2H’20|
|MUR||No plans to add rigs in 2H’20|
|OAS||Zero rigs running.|
|OVV||Running 7 rigs today (3 Permian, 2 Anadarko and 2 Montney).|
|PDCE||Running 1 rig. No plans to add additional rigs in 2H’20.|
|PE||Running 2 rigs. Will likely add 2-3 rigs in Q4.|
|PVAC||No disclosure on current/projected drilling activity.|
|QEP||Running 1 rig with plans to add 1 rig in September|
|RRC||Rig count at 1 rig, down from 4 rigs.|
|SM||Running 4 rigs with plans to drop one rig in October|
|SWN||Running 2 rigs. We believe it stays flat at 2 through 2H’20. Had been running 5 rigs.|
|WPX||Running 9 rigs, down from 15. Will drop 1 Williston rig in Q3.|
|XEC||Running 3 rigs with plans to add one rig in September|
|XTO/XOM||Stated a rig count of ~30 rigs which would likely be cut in half by YE’20.|
Land Driller Observations: Public land drillers generally cite flat-to-improving outlooks. Most stick to just near-term observations while a select few stick their necks out a bit and offer thoughts through year-end. Private players meanwhile offer an off-the-record medium-to-longer term look, so we’ll start with their observations first.
We chatted with private land drillers who are collectively running 23 rigs or ~10% of the U.S. rig count. Over the next few months, these companies collectively expect to deploy as many as seven rigs (~30% jump). In all but one case, the rigs will go to private E&P’s. Moreover, the work is short-term in nature. One company has multiple 1-2 well opportunities which he is now trying to line up in order to keep one rig fully utilized. Inquiries for rigs into 2021 exist, although no firm commitments are in place. The key is to have a “hot” rig ready to go when the calls come in. Of note, one private driller is preparing to deploy a rig for a mid-to-large cap E&P. This E&P company has told our land drilling contact to expect flat activity levels for the next five years. I say to that E&P – you are the Grinch and no fun. No more event invites to you until you spend more money!
With respect to the public land drillers, here’s some of their Q2 conference call takeaways. Overall, we see the collective outlooks as positive (but positive in light of how awful the business is/was in Q2).
- HP guidance implies its working rig count rises ~4 rigs this quarter. The working rig count is 44 rigs as of the July 28th earnings release. (~10% jump)
- PTEN guided an average of 59 working rigs in Q3. Per its website, the company is running 60 rigs today. This includes rigs on standby which we believe is roughly 20% of the count. (flat)
- PDS running 23 rigs at the time of its call and sees potentially 30 active rigs by the end of the year. (~20-30% jump)
- NBR was running 49 rigs at the time of its call and noted an expectation for a Q3 exit rate rig count of 49 rigs, thus flat. (flat)
- ESI.T did not provide formal guidance, but noted it does not see any improvement in U.S. activity in 2H’20. (flat)
- ICD exited Q2 at 6 rigs, but expects to trough at 3-4 rigs in Q3. Management also stated plans to deploy two rigs in August and potentially two more in Q4. (~50%+ jump)
As a reminder, the BKR U.S. land rig count declined 4 rigs to 235 rigs last week. Our rig count forecast, published in mid-June, calls for a Q3 rig count at 238 with Q4 improving to 271 rigs. We assume a more consequential step-up to 371 rigs in Q1.
Conclusion: We feel good about an activity uplift next year and reiterate our land rig forecast. We also remind readers that there is no upside for a public E&P to discuss increasing activity. They are better served to discuss debt reduction, FCF, dividends, etc. as investors want “discipline”. Therefore, we didn’t expect many public E&P’s to advocate rising rig counts. That said, many are now bringing back completion crews, something we’ll discuss tomorrow (or perhaps Wednesday). These working frac crews, which we think exceed 100, are largely being used to complete DUCs. At some point, however, DUCs evaporate and you can either drill or close up shop. We think the industry will drill.
No investment advice here….just reminding you once again…..