After dropping more than 50%, the rig count is beginning to stabilize and patterns are emerging that suggest the form the recovery will take. The key? What types of producers are drilling, and what type of drilling are they doing, according to analysts with Barclays Capital.
The rig count is expected to remain in the current range for the remainder of 2009, with the possibility of a rebound if production falls low enough to eliminate the storage overhang by mid-2010, say James Crandell, Biliana Pehlivanova and Michael Zenker.
The analysts delved into data from the SmithBits rig-count survey and came up with interesting results for what may transpire as the cycle begins to turn. They divide producers into four categories: majors, large independents, midcap and single-rig drillers.
The majors’ rig count doesn’t respond much to drilling cycles, because they are more concerned with reserve replacement, and U.S. natural gas is a small part of their output. They also are relatively unaffected by capital constraints, say the analysts.
Large independents, however, accounted for more than 70% of domestic production in 2007 and much of the production growth since 2000. As a group they are “highly opportunistic, ramping up activity when prices are advantageous, and they are leaders in shale development,” the analysts add.
Middle-tier, smaller independents also respond to short-term price signals, popping up during expansions and receding during downtimes, while single-rig drillers have been the most stable through cycles, though their drilling activity has declined somewhat in recent week.
Based on that data, large independents and midcap drillers are the ones to watch now, the Barclays team surmises. These producers were responsible for nearly 95% of rig additions through the 2008 peak and were the first to begin pulling back in fourth-quarter 2008 and first-quarter 2009. Independents are now operating 57% fewer rigs, and midcap producers are down 60% from their peak.
These two types of producers also shared a focus on directional drilling in promising shale formations during the 2008 expansion while keeping their vertical rig counts unchanged. Both pulled back after the downturn, but both have recently added rigs, signaling stabilization in drilling trends, the analysts report. Overall, shale drilling dropped less (44%) than the total rig count decline (57%).
Meanwhile, integrateds and single-rig drillers have maintained steady directional-rig counts with declining vertical-rig counts.
Availability of capital will have some effect on the drilling recovery, though with a different outcome for each type of producer.
“Integrated companies face the least capital constraints, and their rig-count levels depict a chosen amount of activity regardless of credit conditions,” report Crandell, Pehlivanova and Zenker.
Single-rig drillers are usually privately financed and have limited reliance on credit markets. “These two groups will likely face few capital constraints in rebuilding the rig count once prices dictate,” Barclays says.
Similarly, large independents with good drilling opportunities generally have open access to credit markets. “The producer type that is at risk looks to be the middle-tier group, many of which are privately held companies with limited access to the capital markets,” he says.
It remains to be seen how much the middle-tier “mom and pop” producers have been affected by the drilling downturn and the larger credit environment, the researchers add. Still, they expect the next cycle to see independents and middle-tier drillers increasingly exploiting shale formations and supporting a drilling recovery, with integrated producers continuing to decrease in influence over production and rig count.
The analysts believe E&P expenditures will be down 38% in the U.S. in 2009 compared with 2008, with large companies (those spending more than $1 billion annually) cutting back 33%.