Energize Weekly, March 31, 2021
U.S. onshore oil and gas drilling showed signs of recovery in the fourth quarter of 2020 and the first few months of 2021 – sparked by a rebound in oil prices and strong activity among private companies, according to a Colorado School of Mines report.
Among the signs of the sector’s revival are a quarter-on-quarter increase in employment to about 370,000 and a 50 percent drop in bankruptcies to 23 in the fourth quarter, the analysis by the school’s Payne Institute for Public Policy said.
West Texas crude oil prices rose from $29.14 a barrel in the second quarter of 2020 to $61.50 by Feb. 26, 2021. “This price increase is both stronger and has come more quickly than the industry feared last year as it considered prospects for ‘permanent demand destruction,’” the report said.
In response, onshore rig counts have risen from a low of 230 in mid-August to 293 in the fourth quarter of 2020 and to 450 by the end of February 2021. Frac crews, which had dropped to a total of 45 in May 2020 rose to 132 in the fourth quarter and 175 by early February.
While publicly traded companies have not dramatically increased their spending on production, private companies are leading the resurgence.
“Private oil companies tend to respond more quickly to higher oil prices — privates have already led recovery and can be expected to continue to do so — although public companies likely increase extraction activity somewhat as well,” the report said.
Public companies, after raising a lot of cash and running up debt to boost production, are trying to win back the confidence of investors and lenders. To do that, they are investing less in production, paying down debt and returning more cash to investors.
Based on this “newly conservative approach,” the report said public oil companies are setting capital budgets that are modestly below 2020 budgets, which themselves were sharply less than 2019 levels.
“Industry analysts believe that in U.S. onshore, perhaps only the Delaware play of the Permian basin will see higher investment in 2021 than in 2020,” the report said.
At the end of 2020, private companies were operating a little more than half as many rigs as in early 2020 compared with public companies running only a third as many rigs. ExxonMobil was operating just 15 percent of its early 2020 rig count.
Another trend that is bolstering private-company activity is a new round of mergers and acquisitions. Unlike the public, multibillion-dollar deals in 2020, such as the ConocoPhillips acquisition of Concho Resources for $9.7 billion, activity is now focusing on smaller, private deals that “reflect private equity’s desire to exit this sector.”
Among these acquisitions are Grayson Mill Energy’s Feb. 10 purchase of Equinor for $900 million and Continental Resources acquisition of Samson Resources II in January for $215 million.
The large corporate deals pointed to corporate-level layoffs, consolidation of activity and “arguably less activity/spending,” according to the analysis.
But “at the risk of over-generalizing,” if they continue, the smaller private acquisitions could lead to incrementally more extraction activity, employment and production.
“Buyers benefit from scale economies, improved project inventory and perhaps stronger balance sheets and … the acreage is no longer held by a Private Equity industry that has been limiting spending, in part to manage heavy debt loads,” the report explains. This private company focus on smaller acquisitions is likely to continue.
