9.5.21 – DEP Industry Observations: Rig Count Thoughts, GDP 2022 Budget

DEP Update:  Light news flow this past week, so a quick note this weekend.  First, we hope everyone is enjoying the three-day weekend and hopefully, you got your fill of college football yesterday.  Be sure to watch the video clip of the Wisconsin fans going crazy at the playing of House of Pain’s hit Jump Around.  Great video and great fans (too bad they lost).  As for research, this week we clean up our rig count forecast as well as touch on GDP’s recent 2022 budget announcement.

Upcoming Events.  The Permian Basin BBQ Cook-Off will be on September 30^th.  Our next Houston golf outing is tentatively October 20^th.  DEP subscribers will receive a separate email about golf this week.  With respect to field tours/trips, this week we are loading up on local Houston meetings.  Next week we’ll be presenting at the Energy Workforce & Technology Council’s Annual meeting in New Mexico and then the week of September 20^th we hit the DFW area again.

Permian BBQ Update:  We are in the final stages of BBQ planning and this week the team is making a hard push to get folks registered.  Presently, we have 57 cooking teams and a growing list of event sponsors.  First, to those companies who stepped up to support DEP, we thank you.  Second, there are a huge number of cooking teams and sponsors who have yet to register a single attendee, thus look for a bit of pestering from us this week.  We want to remind industry friends of our strict invite-only philosophy for DEP events.  This means you must be registered to gain entrance into the BBQ, so please take the time to do so.  For cooking companies, please check with your cooking point-of-contact to see if they have submitted your attendee list.  Alternatively, email us if you need the registration link again or you simply want to double check if you have a confirmed registration.  Better to register and no-show than to not register and get turned away.

BKR U.S. Land Rig Count: Continued w/w gain with the rig count up +5 rigs to 495 rigs.  The tables below present a quick snapshot of the basin-by-basin comparison of (1) today vs. the end of Q2 and (2) the YTD improvement.  While the Permian gets all the love, we note a number of the hobby basins have actually witnessed the greatest percentage improvement this year.

Land Rig Observations:  This past week we caught up with a number of our private land drilling friends.  Feedback was consistent: (i) inquiries for rigs continue to percolate; (ii) dayrates are moving up; and (iii) labor is problematic.  However, one nuance this update versus prior updates is an alignment by contractors who now wish to avoid “hassle”.  For example, each contractor reports opportunities to deploy more equipment through year-end, but each contractor expresses a view of why bother.  Yes, pricing is beginning the upward move with multiple contacts claiming base rig rate renewals in the $18,000 to $20,000 range or in other cases, companies with lower quoted dayrates are obtaining more add-on charges, but the “hassle” required to reactivate stacked equipment leads some to question the virtues of higher utilization.  This caught us a bit off guard as historically the OFS sector has always been volume over profits, but crazy as it may sound, a growing sense of discipline seems to be emerging.  Yes, our query was with a small sample, but the alignment in talking points nevertheless surprised us.  Time will tell if this actually plays out.  Of note, all drillers now report customers are paying mobilization charges as there is a strong preference to secure a “hot” rig.

Rig Count Forecast:  No major revision to our numbers.  We had previously assumed the 2H’21 ramp would be more in Q4, but Q3 has moved up faster than anticipated, thus our revisions to 2H’21 are largely clean-up.  Beyond 2021, our working thesis is largely unchanged: (i) we assume the forward curve is reality (i.e., no major geopolitical event, no OPEC+ deviation, no COVID shutdowns, etc.).  Moreover, we believe E&P’s maintain their capital discipline focus while our gut tells us more E&P M&A plays out, a headwind for activity.  The consensus view amongst our land drilling contact group is an additional improvement of ~10-20% in their respective rig counts through year-end – we note their growth expectations does conflict somewhat with their chatter about discipline.  Let’s take the low end of the range, if this plays out across all the land drillers, the implication is a year-end rig count approaching the 525-550 range.  Note: we are in the process of surveying our E&P friends and intend to summarize their views next week – the few initial replies, however, concur with the land drillers outlook.

With respect to 2022, none of the drillers report any real visibility into incremental additions next year, but some companies are fielding inquiries.  Other observations: (1) drillers facing labor challenge and rising costs (i.e., steel, high pressure fluid ends, etc.) which limits the appeal of reactivating cold rigs at current pricing; (2) drillers report many rigs still operate on short-term contracts thus some believe the rise in inquiries is really just E&P companies testing the market as their working rig contracts come towards conclusion (i.e., these inquiries might not be for incremental rigs).

In terms of our forecast, we raise our near-term estimates by about ~5%.  Hardly heroic, but really a reflection that our prior view was too conservative, hence we need to catch-up.  As we digest this week’s land driller discussions, there isn’t yet a surge in inquiries which would lead us to believe another inflection is developing.  Moreover, we remind readers the Q2 E&P commentary still hammered home the capital discipline narrative.  Meanwhile, those E&P companies who offered a view towards 2022 show a continuation of the discipline theme (i.e., FANG, EQT, PDCE, COG, GDP).  Consequently, we find ourselves in the camp that the U.S. rig count, per BKR, likely stays sub-600 for much of 2022.  That said, budget season is just around the corner which means the real story should become a bit clearer in 6-8 weeks, thus we’ll make another round of calls in mid-October.

Goodrich Petroleum 2022 Budget.  Not a needle mover for domestic upstream activity, but perhaps the spending plan could be viewed as emblematic of what we might see from other SMID-cap E&P’s.  First, for those not familiar, Goodrich is largely an ETX/North Louisiana focused small cap E&P.  The company’s capex spend YTD was $29M in Q1 and $20M in Q2.  GDP is expected to spend $23M-$27M in Q3 with a seasonal decline in Q4 with capex budgeted at $16M-$20M.  Thus, 2021 capex spend will range between $88M-$96M.  For 2022, the company will spend between $105M and $125M.  Using the mid-point, this implies a 25% y/y increase or a ~15% increase relative to the Q3 annualized run-rate.  For 2022, GDP expects to generate FCF of $65-$85M based on current strip pricing and its reinvestment ratio will be ~60%.