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Déjà Vu - The Impending Slowdown in Oil, Gas and NGL Production: A Slow-Motion Train Wreck

Statewide shelter-in-place orders, worldwide business shutdowns, market meltdowns, medical calamities. Much of what is going on right now is unprecedented in the modern era, and there are no guideposts to help predict what happens next to the world as we knew it. But in the boom-bust energy sector, it is déjà vu all over again. We have seen steep drops in prices, drilling activity and production enough times to have some idea about how this is likely to play out. Granted, this time around it is particularly bad, but that doesn’t change the sequence of events that we are likely to experience over the coming months and years. Today, we’ll look back at what happens to Shale-Era basins after a price collapse, focusing on the inherent lag between a major reduction in activity level and the inevitable production response.

Anybody who thought the $4.85/bbl increase in crude oil prices on Thursday was anything other than a head fake was kidding themselves. The price of CME/NYMEX Cushing WTI crude oil for April delivery (the last day of trading for the contract) fell by the end of the day to $19.46 before the settlement was posted at $22.43/bbl, down $2.79/bbl. The WTI May contract closed at $22.63, down $3.28/bbl. Forget fundamentals. Crude oil prices are now totally dependent on the next news flash, press release, rumor or stock-price shock. About the only thing we can be sure of is that it is likely to be a long while before we see the sunny side of $50/bbl crude oil again.

As we detailed in Paint It Black on Friday, producers are responding to that harsh reality by cutting their capex budgets even deeper than their initial 2020 plans. Even before last week’s price carnage, the 42 E&Ps that we cover in the RBN blogosphere had announced that their total capital spending would be cut by 26% from previous guidance and a reduction of 36% versus 2019. No doubt we’ll see many more cuts in the coming weeks. But there are a couple of important things to note. First, with only a few minor exceptions, E&Ps are still drilling, collectively planning to spend tens of billions of dollars to bring more oil and gas to the market. Second, these companies are in survival mode. Consequently, those billions are being spent drilling the sweetest of the sweet spots using the most productive drilling and completion equipment out there, so volumes are not falling off nearly as fast as are capex dollars. For example, on March 16, EOG Resources announced a 31% capex reduction but said that it expects 2020 production to be flat compared to last year. Granted that’s down from their previous guidance of 10%-14% growth, but it is not a decline. When all the guidance comes in with first-quarter results, we expect that our universe of companies will come in collectively somewhere around a 6-8% decline in production targets. Down, but not out.

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