US oil rig count rises for a 6th straight week

31 Aug 2015 | Author: | No comments yet »

Drillers added just one oil rig this week.

In the week ended August 28, the number of rigs drilling for oil in the United States totaled 675, compared with 674 in the prior week and 1,575 a year ago.

The aerial view from a Midland, Texas-bound airplane tells the story: thousands of well pads carved into the desert shrubbery as far as the eye can see. Including 202 other rigs mostly drilling for natural gas, there are a total of 877 working rigs in the country, down by eight week over week, and down 1,037 year over year.

The area is home to the Permian Basin, the most prolific oil-producing formation in the U.S., a hydrocarbon-rich collection of formations that stretch from Texas into New Mexico. Benchmark West Texas Intermediate (WTI) crude oil had a wild week, posting a 52-week low of $37.75 a barrel on Monday and rattling around at $40 a barrel until midday Thursday, when the price took off and ended the week at $45.33, after touching a high of $45.90.

Once written off as a place for tumbleweeds, the area has become a boom region in the past decade as the advent of horizontal hydraulic fracturing—”fracking”—brought new investment to waning, vertically drilled oil fields. The U.S. commercial crude oil inventory dropped by 5.5 million barrels last week, virtually all due to a drop of more than 800,000 barrels a day in crude imports. But as crude prices have collapsed over the last year amid oversupply and waning global demand, cutbacks have once again starkly taken root in this oil patch, which has experienced boom and bust cycles for nearly a century now. Drillers found a brief respite at $60 per barrel crude and in May and June and began putting rigs back to work — sending the oil rig count up from a low of 628 in late June.

Two came online in June, when oil climbed back above $60, a move that had many in the sector, including the Dallas Federal Reserve, believing the worst was over. Hedge funds — under the Managed Money heading in the Commodity Futures Trading Commission (CFTC) weekly Commitments of Traders report — dumped 3,154 short contracts last week and added to their long positions by 3,526 contracts. Already, one can see nearly 40 inactive rigs sitting quietly in an industrial park outside of Midland, pointing straight up into the sky because there isn’t enough room to break them down and store them sideways. The numbers, he and others maintain, are also changing drastically and quickly. “There are some companies out there that have figured out a way to cut their drilling costs by 50 percent,” Robertson said. “While a few months ago, their break-even point may have been one (price), now it’s different.” One company taking advantage of lower labor and equipment costs is Midland-based ExL Petroleum. The 10-year-old oil and gas producer sold its assets to another company last year and since then has been sitting on its cash pile, making plans to expand and begin drilling new wells on new land. “if you’ve ever been to a casino, there’s a $5 table, a $10 table, a $50, and then there’s a table behind the glass, but they’re all the same game.

Whichever table you’re playing, the odds—it’s the same game,” said Doug Robison, president and founding partner of ExL Petroleum. “At $38 a barrel, if the cost has come down, the return is the same. He pointed to the beginning of the “new resource play” in Permian in the early- to mid-2000s, when crude was $25 a barrel, to illustrate what can be done at low prices when costs are inexpensive. Larger, more cash-flush players are already quietly gobbling up assets from smaller, private, harder-hit companies that have hedges expiring and debt payments coming due. Enterprise Products Partners L.P. (NYSE: EPD) lists a posted price of $41.67 per barrel for WTI and an August 29 price of $32.41 a barrel for North Dakota Light Sweet.

If the Federal Reserve begins raising interest rates, that will take its toll as well—not only making debt more expensive, but likely adding more strength to the dollar, which in turn will continue to weigh on commodity prices. “There are companies that overspent and overcapitalized … when the prices were high, (and) they may be in some jeopardy,” Robison said. “We’ll see some companies go under, and that will create opportunities for others. It’s the law of the jungle.” Production has continued to tick higher as rigs have come offline because once a well is drilled, that particular piece of equipment is no longer needed for further production out of the well. Added Robison: “For us, it’s going to be a time of being as efficient as possible—to make sure that we perform at the wellhead … and be as smart as we possibly can on our expenditures.

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