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David Messler
Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and…
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By David Messler - Jan 01, 2024, 4:00 PM CST
- Oilfield services operators focused on land-drilling could see the weakness they experienced in Q-4, 2023, continue into Q-1, 2024.
- Lower prices bring about a sharp curtailment of drilling and a moderate reduction in completion activity in shale.
- Oilfield services sources: we are just about in balance with legacy shale declines, drilling just enough to move production higher incrementally higher.
Despite a late Santa rally in the oilpatch this week, it’s probably time to recognize that we are on the verge of a reset of expectations for the oil sector in the developing, likely 2024 price environment for WTI and Brent. We are about one inventory build away from a trip back into the $60’s for WTI and the low $70’s for Brent. Do we stay there for long? I doubt it, and will discuss why in this article, but it could happen. In this article I will discuss what I see as the most likely scenario for 2024.
The effect of lower prices on activity
The most probable scenario in my book is that lower prices bring about a sharp curtailment of drilling and a moderate reduction in completion activity in shale. Most of the shale drillers have a strong inventory of drilling locations where capex is funded with WTI at $40. But that’s a rainy day…or “rainy year” scenario, and doesn’t mean the CEO’s of these companies won’t pull back funds if the current weakness is sustained. In my view, if there’s any significant time in the $60’s for WTI, capex budgets are going to start being trimmed. Sub-sixty, they will be slashed. Investors who have gotten used to hefty dividends and massive debt and share count reductions over the past couple of years will demand it. The old saying the “Cure for low prices, is Low prices,” is still true.
I discussed some of the challenges facing the U.S. shale industry in an OilPrice article at mid-year. Thus far improvements in technology and efficiency have kept this from occurring, but investors should regard this roll-over as being delayed rather than cancelled. Industry sources tell me that we are just about in balance with legacy shale declines, drilling just enough to move production higher incrementally higher. We’ve seen that over the past few months, with only the Permian and the Bakken adding net barrels incrementally.
For example, the chart above from the most recent edition of the EIA-DPR, shows a net addition in the Permian of 760K BOEPD in 2023. That’s good, right? Deeper inspection shows that much of this occurred in the first quarter of the year when the rig count was 20% higher than today.