The US oil and natural gas rig count dropped by 47 to 766 on the week, according to rig data provider Enverus, as exploration and production operators continued to steeply reduce capital budgets and activity for 2020 owing to both low oil demand and plunging crude prices due to the coronavirus pandemic.
The drop was the largest single-week hit since the final week of December 2015, when the rig count fell 77 to 691 while oil prices were in the mid-$30s/b and falling.
Crude prices are even lower now. Around 2:40 pm ET Thursday, front-month WTI crude was trading below $23/b.
“This [scenario of slashing activity] might be just the beginning, depending on how long lower prices persist,” Linda Htein, senior research manager-Lower 48 for energy consultancy Wood Mackenzie, said in a Thursday webinar on the current oil and gas landscape.
This past week, 40 of the 47 rigs shed were oil-directed, to drop the total to 627, while rigs chasing gas dropped by seven to 139.
Nearly half of the rigs dropped (20) came from the Permian Basin of West Texas/New Mexico, leaving a total of 396.
Another five rigs exited in the Denver-Julesburg Basin of Colorado, leaving it with 21, while four more were laid down in the Eagle Ford Shale of South Texas, leaving 68.
GAS-WEIGHTED RIGS RELATIVELY STABLE
But gas-weighted rigs were remarkably stable, with both the Marcellus Shale of mostly Pennsylvania and the Utica Shale mostly in Ohio unchanged at 38 and 10 rigs, respectively. Rig counts in each of those basins held steady for the fourth consecutive week.
The Haynesville Shale in East Texas/Northwest Louisiana shed one rig, leaving 40 operating.
The numbers add up to a discouraging industry prognosis, according to the latest Dallas Fed Energy Survey released Thursday. The local federal reserve called its results the “bleakest” since the poll began in the first quarter of 2016, also a time of falling oil prices and turmoil in the oil patch.
“The results suggest profound and difficult changes ahead for the sector,” the survey said. “At current price levels, [energy executives’ responses] suggest many companies will have difficulty covering operating expenses.”
The survey, which queried more than 200 industry participants March 11-19, found more than 70% percent of E&P companies have cut expectations for capital spending next year.
In the week since then, further reductions followed and some operators made a second rounds of cuts.
COMPANY OUTLOOKS ‘DETERIORATING’
In addition, more than 80% of oil patch executives reported a deteriorating outlook for their companies, while a similar share noted “increased uncertainty about the future,” the Dallas Federal Reserve said.
The negative tone was true for both E&P firms and oilfield services firms, it added.
Operators’ breakeven prices for drilling projects are higher than oil prices are today, Htein said. At $35/b WTI, about $10/b above where prices are today, less than 10% of US onshore resources will deliver a return.
But unlike in early 2016, there is little room to cut costs further because most of the improvements have already been made, she said.
“Last time prices plummeted … there was significant room to trim fat,” by asking oilfield service and equipment providers to lower rates, improving well designs and capturing logistical and other efficiencies, she added.
“The unfortunate truth is today it will be much more challenging to push costs down further, so it won’t be an immediate remedy for the current crisis, which is finding a way to deliver positive cash flow,” Htein said. “That was the goal a few weeks ago, but now operators have to figure out a way to do it.”