THE OIL AND GAS INDUSTRY is coming out of the trough and the recovery is even more aggressive than recoveries in previous cycles. Armed with optimism, Robert Clarke, Research Director, Lower 48 for Wood Mackenzie, began his presentation at the NAPE Business Conference in Houston on February 15. Clarke offered up a 12-month outlook for US E&Ps as he did one year ago, but with a vastly different backdrop. In February 2016 the industry was grappling with a $30/bbl price environment. Two main themes from that presentation that carried over: stacked pay potential and Permian activity. But, fast forward one year and, "the days of really bad prices ($30s to low $40s) are behind us," said Clarke, providing the audience with a host of potential positives for 2017. Here, I've summarized Clarke's takeaways.
Integral to recovery is oil price. $50/bbl is a hurdle that, now cleared for nine weeks (as of February 15), has given way to a more positive tone from the industry on the whole. Oil prices may continue to improve throughout the year as Wood Mackenzie analysts believe OPEC will roll over production cuts in May. Even as we now sit, the improved price environment has had "a bit of longevity to it," Clarke said, and it's important because companies are now more confident to make plans.
The "industry is coming back to life," and global spending is up, Clarke said, noting the 3% uptick in global E&P spend to US$450 billion in 2017. Tight oil is at the forefront of that revival. Anticipated 2017 investment by the US Lower 48 "showcases the elasticity of tight oil and the ultra-competitiveness of lower 48 onshore basins," he said, noting that nine out of the 10 largest plays are set to receive more investment than last year and will likely continue to tick upwards. Continental Resources, for one, he said, is ratcheting up spending by 70%.
The Permian Basin will continue to be a big newsmaker in 2017. M&A activity in the Permian thus far in 2017 is off to a faster start than 2016. The Permian offers "value and volume," Clarke noted, and "the bulk of low cost, undrilled locations are in the Permian, no doubt." While Permian Basin production is set to exceed current and planned pipeline capacity by 2019, Clarke said he doesn't view the situation as a big issue as there are other options. Another hot topic in the Permian: the expense. Are prices too high? It depends on your risk appetite, said Clark. Something to consider, he said, are breakeven prices. Expect them to go up in 2017. "When you're really stepping on the accelerator, you're usually short time and equipment. There have been massive efficiency gains, but those may slow down for a bit, but it's ok, it's normal." Costs will go up. Day rates are up 20%-30%. Expect pressure pumping inflation around 20% as DUCs go down, as well as a call on proppants, he said. For these reasons, breakevens could be higher.
While the Permian will continue to grow, the recovery isn't just a Permian recovery. 30% of rigs are expected to settle in the Permian, but that means 70% are going elsewhere, he said. Channeling his 2016 presentation, Clarke once again hit on stacked pay potential. "Everyone loves stacked play in the Permian, but anywhere you see stacked plays, there's potential."
The US added 82 rigs in the last four weeks (as of February 15), marking the largest single month rig addition since early 2011. Seventeen rigs have been added to the SCOOP/STACK. And, as noted previously, nine of the 10 largest North American plays are expected to see an increase in capital spending. Pay attention to them, said Clarke. "Plays like the Eagle Ford don't die a quiet death," he said, pointing to a recent gas resurgence. There are willing markets to take gas from the area. Both Webb County and the Karnes Trough in the Austin Chalk will likely be discussion points. And, while stacked, be cautious, Clarke said. It doesn't necessarily apply to all Austin Chalk.
Opposite his 2016 declaration to expect no budget space for true exploration, this year's NAPE Business Conference presentation was positive about exploration, and included remarks on some of areas he's watching specifically. Conventional Gulf Coast, Rome Trough, Bossier Shale, Alpine High, Deep Utica, Delaware benches, and Austin Chalk were a few that made his list. Especially compelling, he said, are the economics of the Cretaceous zones in the Powder River Basin. "I think Powder River Basin is going to be a big one," he said.
And just as-some say-the story doesn't begin and end with the Permian, oil isn't the only consideration. There's a strong thesis for gas investment, he said.
For one, Haynesville breakeven metrics are falling and M&A activity is rising. And, if you're a field rejuvenation specialist, look to the Barnett where EURs are close to 2bcf/thousand lateral foot. It's "very cheap to buy," with "lots of available pipe if you want to put drilling capital to work. You might be surprised," he said. "Outliers are what analysts look for. Not every infill Barnett well has been drilled."
Related, he said, is the role of private equity. "The market is being driven by private equity, private equity-backed, and private players. Foundations, endowments, and pensions are driving the bulk of capitalization growth," Clarke noted. There's a lot of long-term capital. For energy investment as a whole, expect to see private equity continue to play a big role, he said, just perhaps in a different way than we've seen in the last 18 months.
I think the industry would be glad to see many things play out differently than they have in the last 18 months. We'll ride the optimism.
