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Is the worst behind us? Insights into the North America onshore recovery
23 June 2020
Chaotic is the best way to describe 2020 to-date. In just a
short few months, the oil and gas industry had the collapse of the
Vienna Alliance talks, the full global implications of COVID-19 and
the upstream industry realizing that the sort of down 2020 that
they were preparing for was going to be far, far worse than anyone
could have ever imagined. Our North America onshore services
team joins Upstream in Perspective to discuss how the recovery is
looking for the various onshore segments, including, proppant,
pressure pumping, water markets and upstream activity.
David Vaucher:
I think the best way to start is really to understand what
activity levels look like generally in North America. So Paula,
I'll throw it to you. How exactly has activity been affected by the
recent collapse in oil price?
Paola Perez Pena:
Yeah, David, well, it is not a secret for anybody that 2020 has
seen a historical decrease in activity. So let's start looking at
rigs. And if we look at the recount, it has struck more than 500
rigs since January, reaching around 280 rigs as of last week. That
is almost 60% decrease in six months, right? So this is a huge
decrease, and it will continue dropping. In fact, we expect that
the second half of this year, we'll see rigs go under 200 now for
the US onshore. So the drop will continue and it will reach a level
that we've never seen. I remember when we first published our
forecast back in April that some clients and some people inside the
IHS Markit team were quite surprised that we were forecasting rig
count below 300 rigs, right. And it was like, it's a huge drop, I
mean, is this really going to happen? And here we are, like as of
last week, as I said, 280 rigs.
So the activity has decreased quite significantly. Now we look
at fractured wells. The reduction in activity has been also
drastic. We went from having around 3,500 fractured wells in the
first quarter of this year. And we're expecting to see a fractured
well count of around 600 for Q4. So if we look at the whole year,
we're expecting to see around an 80% decrease in fractured wells.
So if you look at rates, if you look at fractured wells, like even
frac stages, they are all seeing a significant decrease, above 50%.
And then it changes based on what a specific parameter we're
looking at. One thing that we need to keep in mind though, is that
these accelerated reduction in activity is leaving behind DUCs. And
going forward, the natural think is that operators will focus on
converting those DUCs towards the end of the year, beginning of
2021.
David Vaucher:
Excellent. No, that's great. And I think, Jesus, I don't want to
maybe spoil any surprises if you can really call these types of
things a surprise, because I think everyone knows the answer. But
definitely interested in getting your commentary on this. What
region or regions do you think will be the most affected? And I
think even if we maybe all can anticipate what region might be
affected negatively, do you think there might be a play that
represents a bit of a bright spot in comparison?
Jesus Ozuna:
Yes, David. So in general, like you stated there, the focus has
been on the negative in the place, but I've seen a massive
reduction in activity such as the Permian back in Eagle Ford, but
there are some bright spots in North America, specifically focusing
on the gas space. And most importantly, the Marcellus-Utica
regions. So there we do see activity shifting over and oil field
service companies shifting their activity there because the price
of gases was already very depressed pre COVID-19.
David Vaucher:
Okay, excellent. That's great context. And so I think what we're
doing now is we're setting the scene to say that, okay, things
maybe have leveled out, but now let's look at some of the longer
term implications for specific service branches. And so I think
before we jump into the more granular topics if you can say that
with proppant, I think Jesus, I want to stick with you and look at
pumping. So we've spoken about general activity trends in North
America. How exactly do you see specifically now, activity in the
hydraulic fracturing market, rebounding due to an upswing? We can
definitely call it that. An upswing in prices since March and then
what's the outlook look like for maybe 2020 and then a couple of
years after that?
Jesus Ozuna:
So the upswing in prices has provided some level of stability,
mostly ranging, mostly consolidated to the E&Ps, and it
provides them the stability to be able to reorganize their
financials and focus on securing cashflow for paying off debt and
coming up interest payments. But for the oil field service
companies, and specifically for the pumping, with the high
volatility in the market, there's actions that are being taken now
that are independent of the price of oil. And we don't foresee
those decisions that have been made, quite drastic decisions in
reducing workforce, reducing budgets and costs dramatically
shifting in the next three months or even nine months from now, and
a couple of quarters from now because these decisions have very,
very pronounced and long-term consequences. And it's not as easy to
go ahead and just say, well, we fired or we let go 5,000 employees
and then we're going to bring them back on immediately.
And then the prices over the past couple of weeks have started
to level off and recently have begun to fall again. So there's a
lot of uncertainty, a lot of volatility. We don't see the price
upswing that occurred over the past couple of months, have large
implications in the long-term implications and in the long-term
forecast. Now, we do expect to see some activity to begin to
recover in the late stages of 2021, beginning around 2Q, 3Q 2021.
Once this new environment becomes the norm within the industry, we
do expect some activity uptick. But for right now, for the next
year, we really don't foresee any dramatic increase unless there is
a black swan event that causes oil price to skyrocket. And then we
might find ourselves in a different situation where pumping
suppliers are scrambling to go online because of the dramatic
demand.
David Vaucher:
Sure. So now, taking it one step farther down the value chain.
So Brandon Savisky, you unfortunately, I say unfortunately, you
have the task of reporting every quarter on a market that has been
down for a long time. Right? I think this is a market that has been
viewed as being distressed for quite some time that even leading up
to 2020. So can you maybe just set the scene briefly for what 2019
looked like, and then also provide a picture of what we're looking
at for 2020 and maybe a couple of years out into the future?
Brandon Savisky:
Yeah, gladly. I mean, you've pretty much summed it up. You don't
really need to fly to a very high level to get a view. It's
essentially gone from worse to horrible. And the previous bad is
looking awfully good now. To add a little perspective, we estimate
the annual demand degradation of roughly 64% from the end of 2019
to 2021, which, if you would look a bit further, compared to 2014
and 2015, it's a far greater disruptive magnitude in demand, which
based all about 30%. And that's obviously easy to calculate, which
is creative in half. The downturn in 2014 and 2016 also took about
six quarters to reach its demand curve. And we expect to hit bottom
in just half the time, about three months.
Now, currently on the supply side, the environment remains
extremely favorable for consuming and it's nearly unsustainable for
the suppliers. The market remains highly oversupplied and the
shrinking demand and high supply environment has continued to
suppress prices as you mentioned. And it's resulted in 10 suppliers
generating minimal growth, profitable margins. I just market as
continuing to emphasize the value and not only monitoring
suppliers' financial health, but also collaborating and
facilitating transparency with the chosen source partners, as you
only hurt yourself in your own supply chain through pushing a
high-risk source, the operating edges.
David Vaucher is Associate Director of Research and
Analysis at IHS Markit.
Paola Perez Pena is Principal Research Analyst at IHS
Markit.
Brandon Savisky is Principal Research Analyst at IHS
Markit.
Jesus Ozuna is Principal Research Analyst at IHS
Markit.
This article includes information from an audio conversation
and has been professionally transcribed as accurately as possible.
Some words or phrases may have been unintentionally
excluded.
