Q1’20 earnings season will soon kick off, a chance to hear the latest proclamations from the industry’s leading lights.  Wanting to get a preview of the sentiment, which we know will be bad, we reached out to a basket of our industry contacts in order to get on the ground feedback.  Often, we find this feedback to be the best because it is not filtered and there is no messaging trying to be conveyed.  And while the overarching theme today is lower with uncertain duration, thus negative, we also see signs of entrepreneurial vigor as debt-free (or near debt-free) business owners are chomping at the bit to pick up assets on the cheap.  At least one contact has already started to buy distressed equipment, but virtually all agree the best timing to look for assets will be later this summer as cash flow generation via a pending working capital unwind and/or government assistance begins to dissipate.

This note provides a series of industry observations.  Our discussions lead us to believe the activity declines will be worse than expectations as some segments will rapidly approach a near total shut down.  The most disheartening comments are labor related as the headcount reductions to date and cuts to come will be catastrophic.  And, those who are lucky to keep their jobs will be subject to wage and benefit reductions.  For an industry that has struggled to attract and then retain employees, the events unfolding today will leave years of scar tissue.  For research folks like me who sit in the ivory tower (or at our kitchen table), we are normally immune to these travails.  Yet, these cuts are now increasingly taking a personal toll as emails to contacts are beginning to kick back.  Not a good sign and obviously, this is sad.  Like all of you, we wish nothing more than a speedy recovery.  Unfortunately, our gut tells us that we will need to buckle up and prepare ourselves for quarters, not months of blah activity.  The eventual recovery will occur, but will most likely be a labored affair, barring an amazing cocktail of global production cuts and soaring demand.  In the meantime, for any contacts who may be out of work and looking for career ideas, give me a call.  As a one-week old start-up research firm with no revenue yet, I can’t promise much, but I’m happy to chat and we can brainstorm ideas.  As one who is committed to the energy space, I plan to make the most of the current market and have fun along the way. 

With respect to industry data points and observations, grab your favorite adult beverage and some Pepto.  You’ll need both – that is if you aren’t already using them now.

E&P Capital Spending Revisions:  Like others, we are actively tracking E&P capital spending announcements.  Our list, which is available upon request, includes 48 public companies as well as a few private players (not named in table).  The consistent theme is lower.  Announcements through early April indicate U.S. E&P capital spending will down ~30% y/y and down ~27% relative to these companies original budget proclamations. Keep in mind, real-time activity cuts in the field render these percentage changes somewhat meaningless (more later).  Interestingly, but not surprising is the fact several companies have already made two budget revisions (i.e. MUR, MRO, etc.).  Additional cuts (i.e. companies making a second cut), we believe, will be a likely theme during Q1 earnings season, thus the spending percentage declines cited previously will be stale numbers soon.  We suspect the initial cuts in early March were more a SWAG whereas announcements made on an earnings call should be a bit more refined.  Here’s an example, one company shared that its’ supply chain team is actively running scenarios for upcoming board presentations (likely where decisions will be made).  This company’s original budget revision will most certainly be moving lower as the market is much different today than a few weeks ago.  Pinpointing a precise capex number at this point is still tough as the market remains fluid. That said, with oil realizations well below WTI prices, economics are terrible and many E&P’s are entering shut-down mode.  One private E&P reports realizations on its Delaware production is less than ~$10/bbl while another E&P reports realizations in the teen’s.  The unyielding oil oversupply and pending curtailments are now yielding production shut-in’s and as noted earlier, for some E&P’s this means total activity shutdowns.  CLR is a recent example as it publicly announced yesterday plans to shut-in production.  Specifically, the company believes global demand is off by 30% thus it will reduce production to match the demand fall.  In the same release, it also announced the elimination of its’ dividend and the stock was up 10% on the day.  Last time we checked, dividends cuts were perceived as bad, but if better capital/production discipline is what the market wants, will other E&P’s look at CLR and copy-cat their actions.  We’ll find out soon enough.  With respect to our comments about E&P’s potentially shutting off all activity, thus a reason why spending declines will be more pronounced, here are a few examples from four private players: one private Permian E&P cut its rig count 4 rigs to 2 rigs during 2019; released its third rig during Q1’20 and will soon release its last rig soon.  Because of continuous drilling clauses, it will pick up a rig later this year for short-term work.  This company noted it would otherwise not bring back the rig until such time oil prices migrate back towards $50/bbl.  In this person’s opinion, E&P’s who claim they are making good returns in the $40’s are most likely fooling themselves.  A second private E&P also went to zero rigs and zero frac crews, having previously been at one each.  It shares the view that returns do not justify activity increases until we near the $50/bbl threshold.   A third private E&P had two rigs; is now at one; but will soon go to zero.  It is not running a frac crew now, but similar to the first private E&P, it may have to do some work for leasehold purposes in 2H’20.  Lastly, a fourth private E&P purportedly reduced its frac crew count from two to zero.  It cut is drilling rig count by 30%, but field contacts suggest this may get cut further.

Activity Reductions Likely More Pronounced Than Expected:  Many of our calls this week were with private OFS companies.  The activity reductions are shocking, particularly in the well service sector.  For instance, in the Permian, we learned from multiple service companies of one E&P purportedly reducing its well service rig count from ~50 rigs to ~4 rigs while another is moving from ~35 rigs to ~5 rigs – seems harsh, but that’s what they report.  In the Eagle Ford, a large E&P will reduce its well service rig count by ~75% while another large E&P is purportedly releasing all of its well service rig crews.  In Colorado, a service company reports one E&P will reduces its well service fleet from 26 rigs to zero.  Lastly, one well service company reports its customer, a quality E&P, will cut its completion rigs from 7 to 1.  For those well service rigs still running, they are either finishing up completion projects or doing regulated work, such as P&A.   Conventional wisdom, we submit, believes well servicing is more stable than D&C activity given the focus on production work.  These data points say otherwise and their rapid shut down caught many of our long tenured industry contacts off guard.  We inquired with one E&P as to why this is occurring and it all comes down to cost and a need to reduce production.  This company, as an example, is deferring all maintenance work.  Our contact knows the work deferral will only lead to higher costs and more intensive maintenance work down the road, but the need to preserve cash is paramount.  Another E&P dropped all of its third-party well service rigs and reports any workover project requires VP-level approval.

Land drilling rig cuts are also severe as two drillers each report an expected 80% reduction (relative to Q1 peak) in their working fleets by the summer.  Two others are estimating ~60-65% reductions while a third claims a 40% reduction.  Adding up all of the collective rigs and comparing Q1 vs. the expected low distills into a ~70% reduction (roughly 60-70 rigs going idle in this basket of private players).  Importantly, these rig count cut expectations are based on KNOWN cuts.  Some drillers acknowledge their estimates are biased lower.  Public E&P company announcements to date point to a ~50-55% reduction, but speaking to field contacts on the ground, the pending change could be more severe.  Industry contacts report one large E&P taking its frac crew count lower by ~80% and its land drilling rig count lower by ~85%.  What remains will be assets to hold lease obligations.  Another E&P shared with us that it will reduce its rig count by ~80% and its frac crew by 75%.  Separately, field contacts report another large E&P reducing its frac crew counts from ~15 to ~4.  These cuts are further reaffirmed by a wireline contact who has seen its working unit count decline 86% since January.  Candidly, these numbers are somewhat fluid, but the sharp directional move lower is telling.  And, to prove our point the news will likely be more negative during earnings season, we note the XOM and SOI press releases on Tuesday as XOM announced a $10B cut to capex while SOI announced an expectation for a 50% sequential decline in the frac crew count.  MRO meanwhile cuts its budget again today, moving to $1.3B from $1.9B announced in March and the original $2.4B budget announced in February (get the point how quickly things are changing).  As an aside, based on our channel checks, we believe the Permian frac crew count is somewhere in the range of 50 crews, not sure where conventional wisdom is on this, but we suspect higher.  Package all this together and we believe most industry observers will need to reset expectations lower. 

E&P Capital Spending in 2021 in a $35-40/bbl WTI World?  We do not pretend to be commodity price experts and frankly most people really aren’t.  Can anyone think of a single sell-side analyst or oil macro strategist who, at the start of 2020, called for $25/bbl WTI prices by the end of Q1?  We can’t.  Why?  Doing so would have been the equivalent of hitting a trifecta at the horse track.  Who would have prophesied the Saudi/Russia spat or the dramatic global rise of COVID-19 cases.  And, early in the year, would anyone have made the bet that a global travel ban would be a potential consequence of COVID and/or global citizens would be called to shelter-in-place?  We doubt it.  So do we have a strong view on where oil prices will be next year?  Not really, although we are in the camp that economic activity will begin to come back later this year while a potential Saudi/Russia cut seems more probable today than 4-6 weeks ago.  Why?  Think of the growing chorus of folks questioning whether the cure is worse than the sickness.  Look at the equity markets which have rallied recently in part given news about a nearing of the peak (DJIA +1,627 points or ~7.7% on Monday and essentially flat Tuesday and up nearly 800 points or 3.4% today).  We’ll see if this belief turns out to be the case.  Frankly, the models on COVID-19 deaths appears to have been off relative to original fears.  A good thing, of course.  Assuming this holds, we believe governments will make the tough call to encourage people to go back to work, in part because the populous, we surmise, would rather face a COVID risk than face an economic depression.  In fact, in a Politico article yesterday, Larry Kudlow noted hopes of reopening the economy in four to eight weeks.  Again, we’ll see.  News reports are now highlight several European countries who are preparing to ease restrictions.  In the category of FWIW, we made COVID-19 inquiries in all our discussions this week.  The consensus was an overwhelming willingness to take their chances with the virus if that leads to economic stability.  That said, most say they wouldn’t get on a plane yet.  We also learned field operations are taking the threat seriously.  One service company takes employee temperatures before the work day, at lunch and at the end of the day.  Drivers at this company are required to wipe down their trucks at least twice a day.  One E&P is only allowing workers onto well sites and purportedly has an ambulance crew taking temperatures before anyone can go on location.

Meanwhile, it seems as if every scientist is working on either a vaccine or treatment for COVID-19 – the WSJ reported this week ~140 experimental drugs are in development with 11 in clinical trials.  One could naturally assume this means progress is being made.  Consequently, if the market and oil prices are forward looking, which we believe they are, it would seem the hope of a COVID solution, thus a recovery in demand, coupled with some intervention of Saudi/Russia, should eventually yield some oil price stability (we hope).  Perhaps this is one reason the oil futures curve, if correct, has oil trading in the mid-to-upper $30’s in 2021 and rising gradually in the out years.  Is this enough to spark a recovery in activity?  We asked our E&P friends and most say yes, but in a $35-$40/bbl world, the gains won’t be material.  Not a surprise, but here are some of their observations, starting with the cautious.  Two small private E&P’s contend ~$50/bbl is their respective threshold price to increase activity (except for continuous drilling obligation requirements which might dictate short-term activity upticks) while a third private says it could potentially go back to work in the high $30’s given recent service cost compression.  Some public E&P’s, meanwhile, believe their activity will rebound as growing EBITDA and production is, in their view, necessary to enhance their respective valuations.  Some may debate this logic, but’s that’s what they say.  Few of the bigger companies can (or were willing to) quantity what their exact activity rebound would be in a high $30’s environment, other than stating higher activity than today would be reasonable. That said, one E&P offered up an early prophesy.  This company, which is presently reducing its rig count from ~10 rigs to ~2 rigs, believes that in a $35-$40 world, it would likely nudge its working rig count back into the 4-5 range while it would likely pick up an additional frac crew.  Admittedly, this is more conceptual than predetermined as the focus internally is really on the here-and-now which is reduce costs and weather the current storm.

At this point, do we have a firm 2021 forecast yet.  Nope.  We’re still getting set up and there is still too much too digest.  Our gut tells us any activity rebound in 2021 is likely to be muted as several headwinds remain.  We know this isn’t a bold call and our thesis, at this point, lacks analytical depth.  That said, here’s our logic.  First, we still need to get through borrowing base redetermination season so that we can see what fire power, if any, the E&P industry will have.  One E&P claims one of its banks is now using a $24/bbl price deck for 2020 and mid-$30’s for 2021.  This doesn’t strike us as a price deck which will spur activity growth.  Second, capital discipline still seems to be a theme amongst investors thus will free cash flow improvement go to debt reduction and/or dividend reinstatements before growth capex?  Don’t know yet, but if investors still desire financial restraint, this would make sense.  Third, just when will global demand improve?  While all of us want the economy to start up, I’m not so sure I want to jump on a plane just yet.  Do you?  And, for the many U.S. consumers suffering financial hardship right now, will they choose to go spend money on discretionary items right away (i.e. dinners out, leisure travel, new clothes)?  Or will they choose to fix their own personal balance sheet?  Presumably this matters when it comes to the speed of an economic recovery.  In other words, opening the economy may happen sooner-rather-than later, but what type of economic growth will unfold and how quickly?  All of this plays into global oil demand, but our gut tells us demand recovery for oil could be slow.  Again, hardly a scientific analysis, but that’s our view which is why we believe a modest uptick in activity next year is a reasonable call. 

Headcount Chop is Massive:  It should come as no surprise the headcount reductions afflicting the industry are tremendous.  Field personnel are being laid off each day and this will continue as long as drilling and completion activity collapses.  Prior to the Russia/Saudi squabble and the real fears of COVID-19 materialized, the U.S. land rig count was hanging in the vicinity of ~725 rigs.  This was back in January.  Fast-forward 6-8 weeks and the land rig count now stands at 646 rigs with the first real contraction occurring last Friday when BKR reported a 64 rig drop in the weekly count.  This drop will accelerate as the rig count reductions announced by a number of prominent E&P’s is staggering.  Based on our discussions, we believe D&C activity is likely to contract ~70-80% from Q1 levels.  This means the OFS headcount reductions should mirror the activity decline.  Several companies offered their internal estimates for expected headcount chop – which in our sample is a decline of 63% from Q1 levels.  Several note they may not be through cutting employees.  How long will it take to get these employees back when the market turns?  The longer the duration of the slump, the harder it will be to get people back. 

Field Wages Moving Lower:  Prior to the current woes, a common frustration from certain sectors (i.e. well service, trucking, coiled tubing, etc) was stubbornly high labor rates.  Most companies had seen little wage relief in recent years.  In fact, wage rates for many companies were higher than in 2014, yet pricing was well below the 2014 peak levels, thus huge pressure on margins.  The disconnect between pricing and labor rates, we submit, is consequence of a massively oversupplied oilfield service market (which is why consolidation is no necessary).  Now, the labor situation is changing as the freefall in activity is allowing companies to slash wages.  Multiple private companies have reduced hourly wages in the range of 10-20% while reductions in bonuses and benefits are simultaneously occurring as well.  Several companies noted cuts to 401k plans as an example of a benefit cut.  Employee responses to these cost reduction measures appear understanding as those who see wages go lower at least still have a job.  As for G&A expense, the cuts are deeper.  Just look at the many press releases from public companies announcing 20%+ reductions in executive pay.  As a new research shop, our product and service is a discretionary item and we can attest that the focus on eliminating G&A is real.  In time, consequential field wage cuts, while sad for the employees, are a necessary step which will better position the companies when the market recovery unfolds. 

Rig Count Outlook:  We believe the U.S. land rig count will bottom in the range of 150-200 rigs, a ~75% decline from Q1’20.  Economics and cash flows might theoretically dictate a lower rig count, but it’s not clear to us how much continuous drilling clauses within leasehold arrangements will preserve activity.  That said, if oil prices remain at suppressed levels, we also wonder whether the value of that acreage/lease justifies drilling incremental wells.  In other words, do E&P’s elect to walk away from leases?  As for our formal rig count forecast, we will be rolling it out in the coming weeks.     

Frac Crew Count Outlook:  We believe the U.S. frac crew count will bottom in the vicinity of 50-75 crews.  Our channel checks this week lead us to believe the working frac crew count in the Permian is presently ~50 crews (or will be there within a couple weeks). We did hear several anecdotes about some completion work possibly picking up later this year due to lease requirements which makes us wonder if we bottom in late Q2/early Q3 for frac crews (note – we are not making that call yet).  We are now tracking three frac providers who will be suspending all work.  In some cases, these moves are being made to preserve equipment life as pricing doesn’t justify running the equipment.  Another provider is utilizing 25% of its fleet and is assessing the merits of continuing to operate at break-even levels.  Our sense is this company will suspend operations as well.  Multiple frac providers, we believe, will exit non-core regions where operating scale no longer exists.  Others, we believe, will attempt to use the current market weakness as the chance to finally consolidate the sector.  Companies exiting basins will be a key question for us during Q1 earnings season.  As for those parking equipment, one of the providers will use idle time to make necessary in-house repairs in order to have ready-to-go equipment when the market turns.  We will be rolling out our U.S. frac fleet forecast in the coming weeks.     

Oil Service Pricing:  Weeks ago, many E&P companies embarked on a price concession letter writing/notification campaign to service companies.  These notices generally sought price concessions in the 20-25% range.  It appears service companies have acquiesced.  Drilling contacts report leading edge dayrates for Tier 1 rigs at $16,100/day while another company recently priced a rig at $15,500/day.  Our land rig contacts tell us the speed of the price concessions has been the fastest in their respective careers.  In one case, an E&P let go of a rig which still had 390 days remaining on its contract.  The cancellation fees will be paid out monthly over the remaining term.  In the well service segment, private players report 15-20% concessions thus far.  A company in the pump down market is now priced at $4,900 per day.  This compares to $6,500 per day in late 2019 and down from $8,500 per day in late 2018.  At one point, pump down pricing was in the low teen’s.

Why We Love This Industry:  In these tough times, we must end on a positive note.  Has anyone paid close attention to LinkedIn recently?  If not, take a look at the growing number of postings by OFS and E&P enterprises which highlight the industry’s response to  COVID-19.  There are countless examples of goodwill and generosity: companies donating masks, hand sanitizer and other PPE gear to local first responders and hospitals (NOV, Acquire Oilfield Solutions, Pontotoc Sands, XOM, Flotek, etc.) while others such as Aries Buildings is dropping off Easter baskets to kids throughout some of the small Permian Basin towns.  I love the heart of the people who give back despite the fact our business is in freefall. Let’s not kid ourselves, it’s the people that make this a fun business and why we subject ourselves to the up’s and down’s of this business.  I am also impressed at the amazing attitude amongst my industry brethren.  While most of them are dealing with employee terminations, reduced compensation and essentially no visibility in the coming months, we did not encounter any complaints.  Rather, we have companies who are trying to get creative and find ways to make money.  One company is putting resources into developing a new pump design; another has recently bought used assets in order to start a new business while many are finding ways to shrink, get lean and then be ready when the business normalizes.  A common refrain: you can make the most money in the downturn.   

Shameless Commercial:  For those who made it all the way to the bottom of this note, we applaud you.  Now, a quick commercial.  Daniel Energy Partners will publish regular industry observations, highlighting interesting industry trends as well as profiling new technology and/or interesting companies.  We will also do occasional, but more in depth deep dive reports on select industry topics.  Finally, we will also provide consulting services to companies who may need assistance with topical studies, due diligence requests or investor relations advisory services.  Once the COVID-19 crisis moderates, look for us out in the field as the best research, we believe, is often field-driven.  Finally, since our first few notes will be free, we ask for the following.  (1) Please follow us on LinkedIn and (2) please consider subscribing to our market intelligence platform.  All you need to do is reach out to me and we can discuss the service and pricing in greater detail.  In the meantime, I’m praying for all those impacted by the current downturn.  Things will get better.  Keep the faith.


Daniel Energy Partners is pleased to announce the publication of its first market research note. In this note, we reached out to executives across the oil service and E&P sectors to gauge leading edge sentiment.

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