Oil price stability in mid-$50s restoring confidence in shale country

HOUSTON (Bloomberg) -- Five years ago, the thought of $55/bbl oil would have given Piotr Galitzine heartburn. Now it’s keeping one of his steel-pipe shops in Houston open 24/7 and fueling a flurry of orders.

It’s stoking business for National Oilwell Varco Inc. too, with the oilfield equipment giant selling more land-based than offshore gear for the first time in better than a decade. And it’s got Perry Taylor on the hunt for truckers to haul frac sand. Even at $80,000 a year, jobs are hard to fill. “It’s tough,” said the CEO of Agility Energy Inc. “We’ve got commitments that are very difficult to keep right now, because we can’t get the drivers.”

Crude is nowhere near its $100-plus highs of recent years, but drillers pounced after it steadily crept back up from the $26-bottom it sank to early last year. And as they tap more and more new wells, the rebound is spreading quickly, and powerfully, to the oilfield service outfits that were so hard-hit during the collapse.

“Everyone is so hungry,” said Joseph Triepke, founder of the industry research company, Infill Thinking, in Dallas. “It’s like we’re hanging a steak in front of a bunch of starving people.”

That service companies are hopping again, even with crude worth half what it was three years ago, thanks in large part to technological advances that help explorers to find more pockets of petroleum, and to drill faster and frac smarter. That last bit is key in the shale formations that hold the most promising onshore reservoirs of oil and gas; tapping them requires fracturing the surrounding rock with injections of water, sand and chemicals.

To be sure, this upturn could be fleeting, and some fields are rocking and rolling a lot more than others. The Permian basin in West Texas and New Mexico is the hottest area, because its pancaked layers make it the easiest formation to drill. The burst of activity has helped drive U.S. oil output up at a faster rate than during the last surge, with an average 125,000 bpd added since September. Now E&P spending in the U.S. and Canada is on track to climb four times more than the worldwide average this year.

And Galitzine, CEO of pipe-supplier TMK Ipsco, the U.S. unit of Russia’s TMK PJSC, said he has started hiring again. “Every time I push that computer button that says ‘approved’ on the rehire, I feel better.” He’s pushed it roughly 300 times so far in the past four months, bringing the payroll to the highest it’s been since the start of 2016. Galitzine, though, doesn’t feel comfortable yet. “When we were at $100, to look at $50 would have been very scary.” Now, the confidence that $100 used to instill can probably be had at $65, he said. “That’s how much cost has been squeezed out of the supply chain. So $65 is the new $100.”

Maybe, but meanwhile the costs of tapping oil in the Permian’s stacked rock have been kicking up. Companies are paying as much as $60,000/acre for drilling rights, a 50-fold increase from four years ago, according to Wood Mackenzie Ltd.

Some of the newest, most technologically advanced rigs available for hire from Nabors Industries Ltd., the world’s biggest land rig contractor, are commanding day rates of more than $20,000, up from about $17,000 last year. U.S. Silica Holdings Inc., the biggest publicly traded sand supplier, is seeing the average price of sand at about $35 per ton, 20% higher.

“It’s deja vu all over again,” said  Bryan Sheffield, CEO of Parsley Energy Inc.—who was slated to be on a panel at the CERAWeek conference in Houston on March 7—about the Permian basin’s potential.

Can it last? The answer, as usual, will depend on the pesky supply-demand puzzle. The metric that Galitzine is keeping his eye on is how much the shale drillers are erasing crude cutbacks from Russia and the 13 members of OPEC, which agreed in November to trim output by 1.2 MMbopd.

“For every barrel that OPEC cuts, the American shale drillers are putting on half-a-barrel. If that remains, then I think we’re okay.” If shale fields start churning out much more, “then who knows what’s going to happen to the price of oil,” he said. “Probably nothing good.”