Drawer Position

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Overall US rig count up 4 despite drop in oil units

The tally of US oil-directed rigs ended 17 straight weeks without a decline during the week ended Oct. 28. But the overall rig count was again bolstered by a recent surge in rigs targeting natural gas, with increases in the Haynesville and Marcellus regions. The overall US count has now risen in 19 of the last 22 weeks, gaining 4 units to 557, up 153 since the week ended May 27, according to the latest data from Baker Hughes Inc.  Compared with the count for the week ended Dec. 5, 2014, just before the drilling dive commenced after the initial plunge in crude-oil prices, the overall tally is down 1,363 units. Oil-directed rigs were down by 2 to 441, still up 125 since May 27. Gas-directed rigs rose 6 units to 114, up 33 units since a decades-long bottom in BHI data that was twice touched in August. Gas-directed units were up 11 two weeks ago, while oil-directed units added 11 last week (OGJ Online, Oct. 21, 2016). During an event this week at the Center for Strategic & International Studies in Washington, DC, Laszlo Varro, chief economist at the International Energy Agency, said US tight-oil production “could restart in a dynamic fashion if and when global oil prices improve,” and that US firms “are ready to go.” An IEA annual report on global energy investments explained that the impact of low oil prices on cash flow tested the debt-financed investment model used by US shale producers, resulting in a 52% drop in spending over the past 2 years (OGJ Online, Oct. 26, 2016). “The shorter investment cycle of shale projects and the widespread use of futures hedging [have] enabled independent shale producers to rely on a highly leveraged business model in contrast to major oil and gas companies that rely predominantly on internal cash flow for investment,” the report explained. “Access to bond markets for US shale companies and the cost of capital are directly influenced by oil prices,” it said. “While financial pressures in the shale industry remain widespread despite a recent partial recovery in oil prices, the operators that have filed for bankruptcy represent only a minor proportion of total US unconventional production.” Analysts at Wood Mackenzie Ltd., meanwhile, said a return to double-digit production growth “is still some way off” for most independent US producers unless oil prices rebound to $60/bbl (OGJ Online, Oct. 28, 2016). Analysts see independents striving for cash-flow neutrality, which means financing daily operations without taking on external debt. “We estimate that our peer group of the 17 largest US independents requires an average of $50/bbl West Texas Intermediate in 2017 to be cash-flow neutral and replace production declines,” said Kris Nicol, WoodMac principal analyst for corporate research. US crude production during the week ended Oct. 21 increased 40,000 b/d to just more than 8.5 million b/d, down 608,000 b/d year-over-year, according to data from the US Energy Information Administration. The Lower 48 added 28,000 b/d to just more than 8 million b/d, down 604,000 b/d, while Alaska added 12,000 b/d.