A recovery cycle made for Hollywood with familiar characters

For most of 2017, we have witnessed a steady increase in the Baker Hughes U.S. rig count, from a bottom in the second quarter of 2016 at 421 rigs, to the peak of 947 rigs in the third quarter of 2017.  The fourth quarter of 2017 has shown a slight retreat, and at the time of this publication, the count was averaging 922 rigs. The WTI oil price has traded within the mid-to-high-$50s. For Canada, the bottom was a 49-rig average in the second quarter of 2016 that corresponded with the annual break-up. The peak recovery of 299 rigs in the first quarter of 2017 was followed by a second-quarter break-up count of 114 in 2017, with a rebound in the 200s for the third and fourth quarters. 

Is this cycle different? For companies across the service, supply and manufacturing sector, this rebound is certainly welcome news. But are the good times back? Is this a sustainable recovery? Many of us that have spent our careers in energy have become accustomed to the cyclical nature of our industry, driven by the global changes in supply and demand for oil. But is this script different as the traditional cast (supplier community) learns to deal with a new character (U.S. shale)? Or is 2017 just another correction period to bring the global supply of oil back into balance? I am convinced that each oil and gas cycle has its own unique story, cast of leading characters, and influencers suitable for a Hollywood drama series.

Here’s the setup: fresh off a Republican U.S. Presidential victory in November 2016 and a Republican-controlled Congress, U.S. business optimism and consumer confidence started to improve. The EU’s quantitative easing of monetary policy was translating into GDP growth, fueling more optimism within the EU zone. China and India, although off their GDP highs, are still expanding their economies. The global oil supply chain is meeting the demand for energy to drive economies.

Cast of characters. As with any good drama, we also have our cast of characters. Offering up supply to the market, the Middle East has stabilized oil exports from Iraq while new capacity is entering the market from Iran, along with near-record exports of oil from Saudi Arabia and Russia. However, this familiar story has a new character that has challenged the historical narrative: the U.S. shale producers.

Born in the mid-2000s, the U.S. shale producers have carved out their market over the past 10-plus years. With each cycle, they get more efficient and more productive as a matter of survival. Their success has, in turn, forced OPEC members (and some non-OPEC members) to make tough decisions on whether to give up market share by cutting output to support a higher oil price, or to retain market share by supplying more oil than is in demand and forcing price to retreat. Notably missing from our all-star cast this year is the offshore market, whose need for large capital investment and a longer investment horizon, struggles to compete with U.S. shale players, OPEC, and Russian supply.

Additional factors. For the service, supply and manufacturing sector, the prospects of a higher rig count and mid-$50s oil might seem like cause for celebration. But some firms remain frustrated by the rising number of drilled but uncompleted (DUC) wells, which delay any revenue tied to completions, surface equipment, and related services. According to the EIA, the DUC count has ballooned from around 5,500 at the beginning of 2017 to north of 7,000, including 6,300-plus in oil plays, as of November 2017. Other drags on the sector’s recovery are related to the availability or service tightness of service crews and the lingering effects of late-summer hurricanes.

The Trump Administration continues to move forward with its “energy renaissance” agenda, including renewed access to resources, and embracing a fair, responsive and transparent regulatory system. While these measures are important, policy shifts beyond energy are far more consequential, including trade, tax and sanctions. There may be much volatility and uncertainly in the year ahead, but managing risk—geopolitical, operational and financial—and persevering is nothing new for this sector.  

According to the latest reports, oil demand is forecast to grow until 2035, supported by the men and women that work in the service-and-supply sector. Our ingenuity, creativity, innovative technology, problem-solving skills, and our efficient work processes, are what fuel the leading characters in our story. Many PESA members are at the forefront of this story for today, tomorrow, and certainly in the future. Today, many PESA members participate in industry leadership roles that help to elevate our industry and ensure a robust oil and gas market; train our current and future leaders; and network with industry colleagues to share knowledge and best practices that benefit our industry—not only today, but for future generations.

So, for this made-for-Hollywood drama, the only question remains, who will be the hero in the end?