Q: What impact have OPEC production cuts had on the US oilfield services sector?
A: In June, OPEC extended its recent production cuts through 2024, signaling continued commitment to support oil prices in the face of a weaker global macroeconomic outlook. From a US oilfield services perspective, the cuts have helped reverse oil price declines but have not impacted the gradual reduction in drilling activity this year. Most of those cutbacks have been in more marginal oil basins and natural gas-focused regions where persistently low natural gas prices have negatively affected drilling activity.
Q: What about E&P? Do you see the OPEC cuts impacting E&P?
A: The OPEC cuts are likely causing E&Ps to delay and rethink drilling activity reductions for the balance of 2023. The softness in the market has also led to a surge in E&P M&A activity, where larger producers are taking out smaller players with longer-run drilling inventories for the future. The E&Ps that continue to show significant capital discipline are focused on paying down debt and returning capital to investors.
The unconventional drilling and fracking technology boom has led to more and more efficient ways to drill and complete wells, allowing the industry to maintain and even grow production with significantly fewer rigs. E&Ps generate many of these efficiencies by keeping drilling rigs and frack spreads occupied, so there will be tension not to reduce activity too quickly, limiting the ability to increase activity and maintaining the high-efficiency levels they’ve grown to rely on.
Q: Why are we hearing from the Big Four drillers that they’re targeting nearly $30,000 super-spec rig day rates?
A: The Big Four drillers were essentially sold out of their high-spec rigs earlier in 2023, and they’re not building more, despite average contracts for super-spec rigs hitting $29k per day. In the recent past, E&P companies would often enter into 4-year contracts with drilling contractors to build a new rig. By the end of the contract, with the higher day rates, the driller had the rig CapEx fully paid out. That’s no longer happening, as both sides are taking a more conservative approach. A material portion of the day rate increases have gone to cover higher wages and higher rig maintenance costs. In 2018, running a super-spec rig cost $11k to $12k per day, while today, it is likely closer to $14k to $15k.
Q: Is there any appetite for building new rigs from the big drillers?
A: I’m not aware of any drillers looking to build rigs on spec without a long-term contract from an E&P company, and those are not available in the market today. Drillers are more likely to continue to invest in keeping their current rigs in top working order and would look to upgrade idle rigs to super-spec capabilities before building new rigs.
The unconventional drilling and fracking technology boom has led to more and more efficient ways to drill and complete wells, allowing the industry to maintain and even grow production with significantly fewer rigs. E&Ps generate many of these efficiencies by keeping drilling rigs and frack spreads occupied, so there will be tension not to reduce activity too quickly, limiting the ability to increase activity and maintaining the high-efficiency levels they’ve grown to rely on.
Q: How do you break the stalemate between declining rig count and increasing demand?
A: The rumors of the death of the O&G industry are overblown, but we expect the industry to be in a period of reduced volatility, where E&P companies and drillers will continue their conservative approach. Slower and steadier for longer is likely the order of the day, but things can change quickly in the oil patch. It will be interesting to see how E&Ps and drilling contractors respond if oil and gas prices continue to rise.
