FreightWaves’ SONAR chart of the week (May 5, 2019 – May 11, 2019)
Chart of the Week: Drilling Permit Approvals, New Drilling (USA) vs. WTI crude oil price (SONAR: DRILLNEW.USA, WTI.USA)
The rise in crude prices is not resulting in an increase in the rig count and particularly not an increase in new drilling permits. (IMAGE: SONAR WTI.USA, DRILLNEW.USA )
The general rule of thumb in drilling for oil and natural gas is the higher the price, the more drilling activity there will be. That should mean that in a time like now, with oil having surged pretty much continuously since the start of 2019, the demand for all of the materials associated with drilling–sand, cement, steel and other equipment–should be soaring.
But the 1:1 correlation never existed permanently, and the shale revolution disrupted it further. Companies found ways to drill multiple wells from the same rig, though the rig count might only count that as one unit. Still, it is an important predictor of the level of activity in the oil patch, even if a rig count of 1,000 today (considered relatively healthy) is likely to be producing a lot more than what a rig count of 1,000 would have produced 20 years ago.
But there’s another number that needs to be watched. That’s the number of new drilling applications, which can be found under DRILLNEW.USA in SONAR complete with regional breakdowns as well. It is exactly what the definition says it: a summary of all new drilling applications in the U.S. or a state. An application can be granted and the company that has it might not act on that permit for quite some time. There may be restrictions on how long they can keep a property without drilling if a permit is granted. But it can be put into inventory for months or even years. (For example, this guide by the Texas Railroad Commission says a permit expires two years after it is granted).
This year, even as oil has tacked on more than $20/barrel since the end of 2018, the oil rig count has not risen. Data from the Baker Hughes rig count showed the oil rig count as of last week at 807. That’s the lowest in a little more than a year–it was 808 on April 6 last year–and is down from the 885 that was in place as 2018 came to a close.
What’s even more striking is the collapse in the DRILLNEW numbers. This is not the same as the rig count. The rig count is work being done in the field on the back of a permit granted weeks or months earlier. DRILLNEW is a new permit.
The chart on DRILLNEW shows an enormous decline that is probably a reflection of companies choosing to do several things rather than chase new permits. One, complete what is known in the industry as DUCs, drilled uncompleted wells where the initial hole in the ground is sunk but the rest of the work is put on hold. A second option could be that shale companies are becoming more disciplined,. The industry has long been criticized for its focus on producing ever-rising output rather than business plan that features what most businesses look to do: make a profit and generate free cash flow. The fact that some companies this year have been boasting about their continued expenditures–which certainly aren’t visible in DRILLNEW–led the investment banking and research firm of Tudor Holt this past week to ask the following question, in a note to investors under the title of “Don’t Raise Your Budget”: “We’re struggling to comprehend why, when buy side, sell side, talking heads and taxi drivers are saying not to, companies press on with budget increases and accelerated growth plans.”
The rig count and DRILLNEW are sending out a signal that maybe that isn’t happening, even if the Tudor Holt note identified a few by name. Still, these sorts of numbers are not positive for the trucking industry. A decreased drilling program means all sorts of declines in freight demand: fracking sand on rail and truck, steel pipe on flatbed, shipments of all sorts of supplies to booming oil fields far from population centers; it’s a long list. It’s a discouraging number for the industry.
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Image sourced from Pixabay