The February 20th edition of the Goldman Sachs Weekly Rig Monitor highlights that another 37 oil rigs were taken out of production last week in the U.S., as oil companies continue to shutdown non-economic oil wells. That number is a big drop off from 87 rigs idled the prior week, and according to GS analysts Damien Courvalin and Raquel Ohana, the deceleration in the trend means that oil firms are starting to get serious about “high grading” (keeping the largest producing and most economic wells in production and shutting down the rest).
US rig count decline tapers off
The Weekly Rig Monitor highlights that the US oil rig count was down again this week, but only by 37 rigs (32 horizontal and 10 vertical, with directional rigs up by 5). Courvalin and Ohana note this is a “slowdown in the pace of the US rig count decline, in particular in the Permian where the horizontal rig count was unchanged this week.”
They also point out that at the county level, “high grading” was finally becoming evident this week, with rising rig counts in the most productive producing areas. This week’s US horizontal rig count across the Permian, Eagle Ford, Bakken and Niobrara shale plays suggests that US oil production growth will reach 515 kb/d yoy by the fourth quarter of 2015 vs. 600 kb/d last week given continued trend growth productivity gains. Courvalin and Ohana broaden their analysis this week to include vertical rigs for these four areas, and the results suggest US production growth dropping to 440 kb/d yoy by the fourth quarter of 2015, a decrease of 60 kb/d compared to last week’s rig count.
Getting closer, but still need more production cuts or lower prices to balance market
Although the US rig count decline is slowing down, the current rig count suggests production growth is dropping close to the level required to balance the oil market. That said, the GS analysts note they: “continue to expect that lower prices will be required in order for the capex and rig cuts to materialize into sufficiently lower production growth given that: (1) we expect high grading to become more apparent, translating into more production per rig, (2) the current rig decline can reverse given flexibility in cutting and bringing back non-contracted rigs (at a lower cost and with hedging), and (3) rising uncompleted well backlog leaves risk to our bottom-up production growth estimate as skewed to the upside at higher prices and into 2016.”
In concluding, they note that their greater cost deflation projection compared to company guidance also leaves production growth risks “skewed to the upside for the same capex/cash flow fiscal balance.”