x Abu Dhabi, UAESaturday 20 January 2018

Signs of recovery adding up for US oil sector

Rig counts are up and the sector's job postings have risen by half. But three straight years of capital expenditure cutbacks will have an effect on output

Oil services company Baker Hughes said late last week that US oil rigs in use were up another five in the latest week at 658. Shannon Stapleton / Reuters
Oil services company Baker Hughes said late last week that US oil rigs in use were up another five in the latest week at 658. Shannon Stapleton / Reuters

The US oil sector is showing further signs of recovery from the depths reached early last year, particularly in west Texas.

Rig counts are up, job postings in the sector have risen by half and productivity continues to improve. Together these factors suggest that a quick bounceback in the US sector could put a cap on gains in the oil price, undoing some of the gains made in the wake of Opec’s initiative to restrain output.

In its latest report, the oil services company Baker Hughes said late last week that US oil rigs in use were up another five in the latest week at 658.

While that was still 40 fewer rigs than were in use in the same week a year earlier, and a whopping 65 per cent below peak usage in October 2014, it marked a sharp rebound from the lows in May last year when total rig count sank to 380.

The biggest jump has been in Texas, which accounts for more than half the country’s land-based oil rigs in use.

The Permian Basin, one of the country’s largest mixed conventional and shale oil plays, which is mostly in west Texas, has experienced a near doubling in its rig count since spring, to 264.

Texas production overall peaked in May 2015 at about 3.6 million bpd and fell to below 3.2 million bpd in spring last year, where it remained for most of the rest of the year, according to the US government’s Energy Information Agency (EIA).

But output from the Permian Basin has continued to grow.

The EIA said in December that it expected output from the Permian Basin to be at a record 2.1 million bpd in both December and January, up from about 1.8 million bpd at the start of 2015.

The increase in output even while rig count has fallen is due to unprecedented improvements in productivity, with output per rig soaring from about 200 bpd per rig to more than 600 bpd, bringing the cost-per-barrel for most producers down sharply.

Apache Corporation, with 44 per cent of its reserves located in the Permian Basin, has one of the largest exposures to the province; its shares rose by 50 per cent during the past year, to US$63.43, following an abysmal couple of years prior, during which it posted losses totalling $25 billion and a 70 per cent drop in its share price.

A “pure play” Permian Basin company, Concho Resources, has had a similar trajectory. Its shares halved from their peak mid-2014 to an all-time low of $77 at the start of last year but recovered most of that ground to end last year at $132.60. The company told investors last month that it plans to raise $600m via a bond issue to ramp up its drilling programme.

“In the third quarter of 2016, a group of publicly traded global oil companies reported the first quarterly profit from upstream production business segments since the fourth quarter of 2014,” the EIA noted in its December outlook.

“Improved profits could encourage oil producers to increase capital expenditures and expand production in 2017 and beyond, especially if oil prices increase,” it concluded.

Another barometer of recovery was a rise of more than 50 per cent in oil sector job postings on the employment website Indeed from a low in August.

The improvement in output for the US as a whole has been fairly modest. The EIA reported that output in October, its latest full month of data, was 8.8 million bpd, up by about 200,000 bpd from the previous month, but still well down from the 9.6 million bpd 2015 peak.

The outlook is not entirely rosy. Energy Aspects, a consultancy, says it expects US production to grow by 350,000 bpd this year, with gains offset by declining production in some provinces “following three straight years of [capital expenditure] cutbacks, a first in the history of the market, which has raised depletion rates”.


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