Reliant Wealth Planning | Louisville, KY

Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: U.S. Rig Count Set to Move Sharply Up Despite Potential Permian Oil Price Problems
July 9, 2018

We expect about a 100 rig gain in the rig count in the back half of 2018, before a more modest growth trajectory in 2019. Given the rig count outperformance in the first half of the year and continued growth in 2018, our average rig count comes in up about 22% this year at ~1,070. After a robust expected exit rate of ~1,160 rigs in YE18, 2019 should see a more modest 14% growth with buffered support from the Bakken and Eagle Ford. More importantly, in 2020 and beyond we expect to see consistent multiyear growth in U.S. oilfield activity as a tightening global oil market calls for robust U.S. drilling activity to keep up with declining base decline rates.

Despite the negative hype around widening Permian oil price differentials (and lower Permian spot oil prices), we see the current U.S. oilfield market as prime for continued growth due to the following: 1) Overall U.S. E&P cash flows are set to be VERY healthy in both 2018 (up 56%) and 2019 (up 18%) supporting continued robust U.S. E&P spending despite widening Permian differentials, 2) Even if Permian oil price differentials widen to an irrational $25/bbl average over the next 18 months (as we are modeling), realized Permian spot prices would still be in-line with initial 2018 budgeting assumptions (in the low to mid-$50 range), 3) Even with the potential Permian price reduction, we expect the U.S. to average realized prices above $65/bbl over the next 18 months since many of the U.S. producers should see realized prices closer to Brent levels, 4) Thus, the incremental rig count growth in Eagle Ford and the Bakken should more than offset a temporarily stagnating Permian rig count, 5) We believe that most of the larger E&Ps will be unwilling to turn off the efficiently running Permian well manufacturing ''machine'' for a short-term downward blip in oil prices, 6) Historically, the rig count lags WTI crude prices by 15-20 weeks (or 4-5 months). Since crude prices have moved steadily higher over the past year, we have yet to see the impact of higher oil prices over the past quarter show up in U.S. drilling activity, and 7) Long-term (2020 and beyond), we expect continued solid (5-10% annual) multiyear oilfield activity growth as operators struggle to offset the impact of rising U.S. production declines.

This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.

There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

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