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.”
“Nearly two-thirds of the rig count drop over the past 12 months was due to privately held companies idling their drilling rigs.”
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.