The U.S. Oil And Gas Industry: A Look Back At 2019
The
folks at Enverus (formerly DrillingInfo) distributed an interesting analysis
recently that reveals a great deal about the story of the domestic U.S. oil and
gas industry for 2019. It tells a story of an increasingly two-tiered business
segment in which the relative financial health of each company is driven
largely by its ability to either generate sufficient cash flow to fund drilling
operations or, failing that, to obtain capital through financial institutions
and/or private equity groups.
Per
the November 21 weekly Rig Count Update, "Nearly two-thirds of the rig
count drop over the past 12 months was due to privately held companies idling
their drilling rigs. During this period, a net 29% of private operators, who
were drilling at the beginning of this period, have since suspended all of
their U.S. drilling operations. Though the rig count appears to have flattened
out over this past week, the rig reductions by private operators continued unabated.
We observed a net five private companies and a net seven rigs controlled by
this group fall out of the mix relative to one week ago. Conversely, the group
of publicly traded E&P companies whose drilling was stable added a net
seven rigs over the week. Think of the private E&P companies as an
indicator of the directional health of the oil & gas industry. Thus, any
activity stabilization for this group of private companies is likely a sign
that better times for the entire industry may be on the horizon. Unfortunately,
we are not observing such a signal yet."
So,
simply put, the big, major corporations who have strong, reliable access to
capital are finding it far easier to fund and even increase their ongoing
drilling operations than the smaller, privately-held companies. This should
come as no surprise, especially the given the following factors:
The
vast majority of drilling in the United States currently takes place in highly
capital-intensive shale and other tight formations;
Commodity
prices for oil and natural gas remain at low levels; and
Financial
institutions have in recent years tightened up lending requirements for shale
producers, with some of the largest institutions looking to move away from that
business segment entirely.
It
is no accident that the most notable private company whose business operations
expanded during 2019 - Houston-based Hilcorp - has focused its business plan on
conventional play areas, avoiding shale almost entirely. It also helps that its
billionaire owner, Jeffery Hildebrand, is able to self-fund much of the company’s
operations, thus limiting Hilcorp’s reliance on borrowing to sustain its
drilling levels.
The
same is true of Comstock Resources, an independent based in Frisco, Texas that
is majority-owned by Dallas Cowboys owner Jerry Jones. Jones’s personal wealth
and heavy investment in Comstock drove its ability to become one of the largest
players in the Haynesville region through its acquisition of Covey Park, LLC in
June. Jones’s backing has also allowed Comstock to emerge in November as a
leading candidate to execute a buyout of the Haynesville holdings of Chesapeake
Energy, a large independent that is teetering on the brink of bankruptcy due to
its own overwhelming debt load.
It
also should surprise no one that the biggest players in the shale space, major
integrated companies like ExxonMobil and Chevron, along with giant independent
Oxy, were the operators who made the biggest splashes in expanding their own
operations in the Permian Basin during 2019. Both Chevron and ExxonMobil are by
and large able to fund their own drilling programs through the generations of
free cash flow from ongoing operations, and Oxy was able to employ some very
creative borrowing strategies - including taking a loan of $10 billion from
Warren Buffet - in order to fund its acquisition of Anadarko Petroleum.
Meanwhile,
other large independents have had to scale down their drilling budgets as
access to capital has become increasingly restricted over time. These realities
have made the increasing bifurcation of the industry between the “have” and
“have nots” based on access to capital the overriding and most important story
of 2019 for the domestic oil and gas industry.
2019’s
other major stories include:
The
rapidly falling rig count - Per the Enverus Daily Rig Count, more than 300
formerly active rigs have been idled in the past 12 months. Amazingly, overall
U.S. crude and natural gas production still rose during that time thanks to
shorter drilling times, increased efficiencies and rising per-well recoveries.
The
newly range-bound oil price - While natural gas prices have been stuck within a
low, narrow range for the better part of the past decade, crude prices had been
all over the place during the same time frame. That all changed in 2019, as the
price for WTI spent pretty much the entire year lingering in a range from a low
of about $51 per barrel to a high of $60 per barrel.
Exploding
exports for both oil and natural gas - U.S. exports of both oil and liquefied
natural gas (LNG) boomed throughout the year, achieving new record highs at
several points along the way. Quick action to expand export capacity at several
ports along the Texas and Louisiana Gulf Coast avoided the development of
bottlenecks that many had feared. By September, the U.S. Energy Information
Administration estimated that the United States had become a net exporter of
crude oil for the first time since the 1940s.
The
dramatic shift in U.S. strategic interests in the Middle East - In large part
due to America’s newly-developed and growing energy security levels, President
Donald Trump felt comfortable avoiding any sort of military response to
multiple Iranian provocations in and around the strategic Persian Gulf,
including the launching of multiple missile attacks on Saudi Arabian oil
infrastructure and the downing of a U.S. drone. The moderate tone of the U.S.
response in turn helped to ensure that the ongoing Iranian provocations have
had little impact on global crude prices.
All told, 2019 was one of the most consequential years in recent memory for the domestic oil and gas industry, one whose major developments will have resonating impacts for years to come. Next week we will talk about what many of those impacts might look like during 2020.