16 Dec 2021 – Maintenance Mode with an Upside
A couple of recent Rystad Energy reports have provided some surprisingly positive news emerging from a tough year for the oil and gas industry.
Greenshoots of Profitability
We’ve had a lot of records set in 2020, most of them negative. Time for good news as we close out the year. Based on a recent Rystad Energy Shale Trends Report, 3Q20 was a record quarter in terms of positive cash flow generation. Sounds surprising, given all the pain in the oil patch, but perhaps this storm of demand annihilation can finally be the catalyst for change in a long-standing industry pattern of capital destruction.
The chief complaint of energy investors is a simple premise: oil and gas producers, primarily shale operators, spend more than they make. Years of investment in growing production has yielded negative returns and unsustainable debt, even before the difficulties wrought by Covid-19. Enter 3Q20 – capex were slashed to an estimated $3.4B, down over $1B from 2Q20’s $4.5B. In this same time period, it is estimated that operating activities generated $7B, generating a total free-cash-flow of $3.5B.
Even more impressive, an estimated 89% of operators achieved a balanced budget status, as Rystad notes a level that has never before been achieved in the shale industry’s history. Overall, the focus on efficiencies, cost-reductions, and disciplined management produced a significant gain in EBIDTA, rising from$1.3B in 2Q20 to $6.5B in 3Q20, while the NYMEX strip price rose by only ~$2/bbl in this same period.
While impressive, serious concerns remain. Massive impairments were taken throughout the quarter to reflect the current state of demand, and the industry remains saddled by worrisome levels of legacy debt. However, out of crisis comes opportunity, and while no one wishes another Covid-19 experience on the industry, perhaps the pandemic has been able to impose a capital and operations discipline that no amount of Wall Street pressure has been able to accomplish in years past. Ultimately, to remain viable and compete for capital with tech and other sources of energy, the oil and gas industry will need to build upon these lessons from 2020 and utilize this new-found capital discipline to guide future operations.
Rig Count Estimated to 60-70 Rigs Under That Required to Maintain Production in 2021
All indications are that 2021 will be a year focused on the maintenance of production levels as opposed to any concerted efforts to grow production. In fact, most reports have 4Q21 to 2022 before a return to pre-Covid-19 level expenditures can be reasonably forecast, and then only if there is continued price support above $50/bbl. That being said, according to a December 2020 Rystad report maintaining US tight-oil production at 4Q20 levels will require an estimated 280-300 horizontal focused rigs in the major basins combined. With current levels in the 210-220 range, there is a realistic expectation for a continued rise in rig count through 1H21.