Rig-count chaos: Shale drillers are confusing U.S. oil analysts

By David Wethe on 1/11/2018

HOUSTON (Bloomberg) -- Call it a rig-less recovery.

As oil prices have climbed almost 50% in little more than six months, the weekly Baker Hughes tally of drilling rigs has stayed remarkably still. Normally, you’d expect the rigs to return to the field as producers flush with added cash looked to boost output.

But shale companies are managing to do more with less, in a recovery that has seen U.S. production continue to climb even without the leading indicator of added drilling. These days, the weekly rig count figure, which had become a focal point in the initial months of the downturn, is now increasingly irrelevant, as forecasters turn to a bigger toolbox of stats, metrics and gauges to get an idea of what shale drillers are up to.

"A well that comes online in U.S. onshore today is dramatically different than one that came on five or 10 years ago," Leo Mariani, an analyst who covers explorers and producers at NatAlliance Securities, said in a phone interview. "It’s just a different animal."

That means that everything from producer spending surveys to oilfield hiring reports, and even demand for the tiny grains of sand that prop open oil-bearing cracks, is fair game for painting the picture. For the market, it means the country that’s become the world’s swing producer and a thorn in OPEC’s side is a whole lot harder to read.

The number of rigs drilling for oil in the U.S. -- from the Gulf of Mexico to the Permian basin in Texas to the Bakken shale in North Dakota -- is less than half the count in the middle of 2014, when the crude market crash began. And yet, America is set to rival Saudi Arabia and Russia, with production expected to top 10 MMbbl as early as next month and to reach 11 MMbbl towards the end of next year.

How? The combination of faster and faster horizontal drilling and more intense fracking has allowed production to explode even as the number of rigs drop. Up until about four years ago, it was safe enough to use the rig count to track activity because the industry was more reliant on single vertical wells.

"You’ve got different levers to pull to get increasingly efficient," James Wicklund, an analyst at Credit Suisse in Dallas, said in a phone interview. "There is not one clear acknowledged reporting source for the metrics that we use. It makes it a little bit murkier."

Brad Handler and other analysts at Jefferies cobbled together a chart of nine other metrics besides the rig count in a note to investors this month. For example, the number of frack stages in a well are expected to increase 14% this year to an average of 28.5, more than double what explorers were able to do in 2014. And the total amount of sand crammed into wells this year is expected to grow 20% to more than 100 million tons.

Chesapeake Energy heralded in the arrival of the monster frack a little more than a year ago, declaring what it called "propageddon" on one gas well in Louisiana with more than 25,000 tons of sand pumped into it.

After switching from the old standby rig count to closely watching the well count a few years back, the latest shift about a year and a half ago is to track how long the wells are drilled sideways underground and how many frack stages are in each of those wells, Wicklund said.

At 7,500 ft, the average lateral length of a well is 50% longer compared to three years ago. And a rig can drill 25 wells a year, compared to 15 just two years ago, he said. But those are stats mainly gathered from third-party data providers such as Drillinginfo and IHS Markit.

On the free side, the U.S. EIA reports monthly the backlog of wells that have been drilled but not completed. As of November, the latest month available, that’s 7,354 drilled but uncompleted wells, or DUCs.

And the U.S. Bureau of Labor Statistics shows that service providers are back to hiring again, with jobs up 21% since oilfield employment hit rock bottom in October 2016. But Mariani said it’s also important to know the specific workforce constraints to get a better picture.

"You started to re-hire aggressively, but we’ve seen multiple reports of just not having enough truck drivers, guys not able to get enough frack crews and the quality of those frack crews that are coming in there," Mariani said. "That stuff makes it difficult, adds another wrinkle to any kind of prediction people want to make for the next couple of years in terms of rate of oil growth."

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