Might We See The Number Of Active Rigs Drop Below 80 This Week? -- May 20, 2015

Active rigs:

	5/20/2015	05/20/2014	05/20/2013	05/20/2012	05/20/2011
Active Rigs	81	188	189	209	178

RBN Energy: E & P CAPEX being slashed to the bone.

The E&Ps have cut Capex to the bone, but as a group they expect oil and gas production in 2015 to increase versus last year.  That’s true from an overall perspective, and it is an important indicator of upcoming production trends.  But the real revelations come when you dig into the details.  In the oily sector, small and mid-size companies are making deeper cuts but are faring much better than the big boys.  On the gassy side, E&Ps in Appalachia are knocking it out of the park, while more diversified gassy players are having a much harder time of it.   Today we begin a blog series to drill deeper into the company numbers to see why and how these differences happen.

We first looked into this issue back in January 2015 using an analysis of capex and production guidance provided by our friends at U.S Capital Advisors.  This time we’ve crunched through the numbers based on data compiled from company’s SEC reporting and issued press releases.  Our analysis indicates a 37% decline in exploration and development spending in 2015 for a group of 31 exploration and production companies.  These very same companies are expecting to increase oil and gas production by 8% this year. The oil and liquids rich gas producers will see the brunt of the spending declines as the crude oil price decline has slashed cash flows, but the very profitable dry gas Appalachian producers will be moving full speed ahead despite low natural gas prices. This initial blog will provide an overview of our analysis, the next edition will review oil weighted E&Ps and the final posting will look at gas weighted companies.

The recycle ratio is a measure of profitability. It looks at field level profitability (netback) in context with the capital cost spent to bring the reserves to production (finding and development cost). The recycle ratio is calculated by dividing the netback (revenue-lifting costs) by finding and development costs. A recycle ratio of 200% is generally considered to be the threshold for value creation. Below that threshold value is not being enhanced.  Figure 3 at the link highlights the profitability variances among the four different peer groups. We charted the recycle ratio along with the average realized oil and gas price for each peer group. The Appalachian Gas Weighted E&Ps crushed the other three groups due to a rock bottom cost structure. The Small/Mid-Size Oil/Liquids Weighted E&Ps and the Large Oil/Liquids Weighted E&Ps posted satisfactory results, but this was with oil prices in excess of $90/bbl.  The Diversified US Gas Weighted E&Ps struggled the most with a misalignment between netbacks and cost structure.  The group had netbacks a little better than the dry gas producers, but with a cost structure similar to the oil weighted producers.  Going forward, the Appalachian Gas Weighted E&Ps will not suffer much from the slashing in oil and liquids prices which will further depress profitability for the three other peer groups. The Diversified US Gas Weighted E&Ps must make most drastic changes since they had the weakest profitability in an already robust oil/liquids price environment. The Small/Mid-Sized and Large Oil/Liquids Weighted peer groups will be pruning back their capital spending, focusing on their best projects to try to best survive this lower price environment.