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In the weeks since the publication of our last WellIQ report <span/>several forces have
plunged the upstream sector into what will surely be an historic
downturn, and it's difficult to overstate just how dire the
situation is in North America specifically.
Indeed, industry sentiment going into 2020 was "merely" bad as
operators continued to be pushed towards capital discipline, and
service companies had to adjust to tough market conditions shaped
by lower activity demand coupled with ample supply. In just a few
short weeks, the double-whammy of COVID-19 and the recent
developments between Russia and OPEC have cratered demand for oil
and, consequently, oil prices (further information on oil price and
production outlooks can be found with our
Energy: Global Oil Market team and
Plays and Basins team).
This paradigm shift caught many by surprise, and the effects to
the North American service industry will be severe following the
near-immediate reaction from operators to slash their capex
budgets. We project spud count and frac count decreasing 76% and
42% respectively by the beginning of 2021, compared to the numbers
published in February's WellIQ release.
Figure 1: US wells frac'ed (thousands) - pre-oil collapse 1Q20
update vs post oil collapse.
Service companies had already been trying to get ahead of weak
market conditions, with sand mines cutting costs and pumping
companies stacking horsepower, notably Schlumberger and Halliburton
which had announced cuts of 50% and 25%, respectively.
Unfortunately, market conditions outpaced even the worst-case
planning scenarios; we expect significantly more capacity cuts, and
these will have to be severe to have any hope of meeting projected
demand on the way down, which we believe may hit zero new wells in
certain parts of the country at discrete times.
Figure 2: US wells frac'ed, frac stages, and well spuds
(thousands) by case.
Unfortunately, we do not believe that companies "on the bubble"
will be able to ride this out. On one hand if there is a silver
lining here at all, it's that service companies don't currently
feel much pressure to grant price concessions since the feeling is
they have already granted many (though some well-capitalized firms
may choose to do so to maintain market share in the hopes this
"investment" pays off in the long-run). On the other hand, despite
somewhat steady pricing we anticipate a deep demand decline until
at least the beginning of 2022, so service companies hoping to hang
tight in the near-term in hopes of surviving until the next upturn
will be out of luck.
Paola Perez Pena is a principal research analyst in the
Upstream Cost & Technology group, focusing on North American
upstream operations, analytics and insights.
