Oil and natural gas drilling is ramping up as demand continues to hold on despite a global resurgence of coronavirus infections. That is sweet music to the ears of oil-field services providers in the United States.
Drilling and equipment contractors here are preparing for a multi-year upcycle on the back of recovering demand and rising commodity prices.
North American firms have led the recovery so far, with privately-owned U.S. shale producers pushing the rig count higher this year. The U.S. oil and gas rig count rose to 491 this month, up from the pandemic low of 244 last August.
Private shale producers are unconstrained by the capital discipline espoused by their publicly-listed rivals, which must keep investments low to ensure they can deliver enough cash to shareholders in the form of dividends and stock buybacks.
Drilling giant Helmerich and Payne said that of the roughly 42 rigs added over the past three and a half months, 39 have gone to private companies.
Despite the continuing capital discipline trend, there are still reasons for optimism in the U.S. market.
Crude oil prices remain robust, hovering between $65 and $70 a barrel, while the natural gas market looks more robust than any time in the last decade.
Benchmark U.S. gas prices are trading near $4 per Mcf, and pundits are already declaring the end of the era of cheap natural gas.
Supply shortages in Asia and Europe have driven prices higher in a market that has increasingly globalized over the past 20 years, thanks to the proliferation of liquefied natural gas (LNG) supplies.
With the world focused on slashing greenhouse gas emissions, the future of gas looks robust as large energy consumers in Asia like China and India look to reduce the amount of coal they burn in power generation.
The UN’s call for the end use of all fossil fuels to combat climate change is a utopian fantasy, and current commodity price strength shows that markets will need more oil and gas for many, many years to come.
Oil services companies are riding the tide, posting solid second quarters and 40 percent to 65 percent share price gains over the past 12 months.
Industry executives offered exceedingly bullish forecasts coming off a quarter in which leading service firms beat consensus earnings estimates. It’s not hard to see why.
There appears to be more room to run, too. Besides buoyant gas markets, where a supply crunch has already developed, many experts see one building in oil as well.
Halliburton HAL -0.7% CEO Jeff Miller expects a call on production growth, led by short-cycle barrels that could hit around 500,000 barrels a day in North America in 2022. Miller said that that would translate to “double-digit” percentage growth in drilling and completion (D&C) spending over the next two years.
That points to higher prices, which would demand new barrels from even the most capital-conscious producers. At prices of $80 or higher, they should be able to deliver financial returns and growth.
Outside of North America, producing regions look primed for growth, too. Global oil demand is expected to return to its pre-pandemic average of 100 million barrels a day in 2022, and major producers are preparing for the surge.
With OPEC-plus supply constraints loosening, national oil companies (NOCs) in the Middle East, particularly Saudi Arabia and the United Arab Emirates, plan to add significant production capacity. These plans should spell fat contracts for oil services companies.
Both Saudi Arabia and the UAE plan to add 1 million barrels a day of new capacity by 2030.
Offshore markets also look ready to pop. Schlumberger SLB -0.4% CEO Olivier Le Peuch has tallied some 50 project sanctions this year and expects 100 by year-end – mainly offshore – marking at least a 50 percent increase over 2020.
Offshore driller Transocean says inquiries for rigs are picking up quickly in the Gulf of Mexico, Latin America (mainly Brazil), Norway, the U.K., and West Africa.
Long-suffering service contractors, which had not recovered from the last downturn in 2015 and 2016, are more than ready to raise prices for their customers and have, in many cases, already started.
ProPetro, a Permian Basin-focused pressure pumper, says price hikes have started and expects to secure increases from all of its customers before the end of the third quarter. Service firms in the U.S. market have largely stopped undercutting one another on pricing to gain market share.
International pricing has yet to reflect the new reality, partly due to longer contract terms. But it’s just a matter of time given continued high oil and gas prices.
Halliburton surprised analysts with a particularly bullish multi-year outlook that calls for revenue to grow at a “mid-teens” compounded annual growth rate through 2023.
Schlumberger says the solid macroeconomic outlook will support “an exceptional growth cycle,” while Baker Hughes BHI -0.1% predicts continued momentum inside and outside North America.
Read it from forbes – Photo as posted on Forbes (TAFT, CA – Oil rigs just south of town extract crude at sunrise in Taft, California. (Photo by David McNew/Getty Images))
