Oil Production Is Expected To Fall Faster

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Daniel Jones

Summary

In this piece, I've decided to dig into new data from the EIA's Drilling Productivity Report that covers the Marcellus and Haynesville regions.

What I discovered is that, similar to my previous analysis, the regions should report a decline in output this year that should help alleviate the supply glut.

Beyond just seeing output fall, though, investors should expect the pace of the fall to be faster than previously anticipated, which is extremely positive moving forward.

Not long ago, I published a piece here on Seeking Alpha that talks about oil production in the Marcellus and Haynesville regions. Due to their size individually, I did not feel it would be justified to allocate one article to each, so I decided to place them together as one piece. Now, with fresh data out from the EIA (Energy Information Administration), I decided that it might be a good idea to revisit these two regions and see what their oil production picture looks like in the months to come, and what this means for the oil industry as a whole.

A look back at the Marcellus and Haynesville regions

In my previous analysis of these regions, I was able to figure out what the future should look like given certain assumptions. One of these assumptions related to rig counts. In my last piece on the issue, I concluded that, in the Marcellus, I would account for a drop of four rigs every month, and that there would be 38 rigs in the month of January. According to the fresh data from the EIA, the rig count last month was actually 36, so I'm including that in my assessment, but still sticking with the decline of 4 rigs every month. In the Haynesville, I decided to stick with 33 rigs in January, with a drop of zero rigs each month because of the historical trend seen in the region. Based on EIA data, that number last month came out to 25 units, but I am still sticking true to the assumption that that's all the further the rig count will fall.

On top of the rig count, I also had to make some assumptions regarding rig productivity. In the graphs below, you can see what the trend has been over the past few years for both regions. Based on recent data, which pegged the Haynesville's month-over-month productivity improvement at 1.5%, I'm still sticking with that number for the time being, but the continued descent seen by the Marcellus has pushed me to decrease the rig productivity improvements down from a base of 3% each month to just 2.5%. This is still above every point seen since last April, and the trend is worsening, so I'm considering dropping the rate to 2% beginning next month if data justifies it.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

The last indicator I looked at for these regions relates to their respective decline rates. In the graphs below, you can see what has been typical for both the Marcellus and Haynesville areas over time. Because of the trends each one has taken over the past several months, I initially decided to look at three scenarios for each: conservative, moderate, and liberal. Under the conservative scenario, I used decline rates for the Marcellus and Haynesville of 5% and 2%, respectively. Meanwhile, the moderate and liberal scenarios have decline rates of 10% and 3%, and 15%, and 4%, respectively. In this most recent release by the EIA, I didn't see anything to warrant any revisions here just yet, but this could change in the future.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

By applying my original assumptions to my Excel spreadsheet, I was able to determine that the amount of oil produced in the Marcellus should tumble by quite a bit this year compared to what was seen last December, no matter what decline rate assumption is correct. Last December, oil output averaged 51,415 barrels per day. By the end of this year, my original analysis figured that the number would fall to between 15,309 barrels per day and 39,302 barrels per day. For Haynesville, the picture wasn't as impressive, with output in December of this year coming in between 42,561 barrels per day and 51,123 barrels per day, compared to last year's 51,448. You can see my analysis in the tables below.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

The picture looks more favorable now

After factoring in the revised numbers I calculated, the picture for both regions looks much, much better for long-oriented investors. This is especially true of the Marcellus, which should see production drop to between 13,957 barrels per day under the liberal scenario and 34,924 barrels per day under the conservative scenario. Haynesville, although not as good, will see its output fall to between 40,198 barrels per day and 47,669 barrels per day by December 2016, if my analysis turns out to be accurate. In the tables below, you can get a glimpse of the monthly track these two areas will likely see.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

To put the data another way, I decided to compare each region's revised December 2016 results with the prior results I came up with, both of which can be seen below. Depending on which outcome turns out to be correct, we should see oil output in the Marcellus decline by an extra 1,352 barrels per day and 4,378 barrels per day versus my original estimates. Hayneville's numbers are similar, with the decline coming in between 2,363 barrels per day and 3,454 barrels per day greater than what I forecasted.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report.

Takeaway

As of the time of this writing, both the Marcellus and Haynesville account for a small portion of oil production on a daily basis within the U.S., but they are both set up to see that output fall in the months ahead. Individually, this isn't material for the oil industry, but when you factor in these differences to what other regions I'm covering will see going forward, they help to paint a bullish picture on the crude oil industry with this country - one that should provide some encouragement for long-oriented investors in this space.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.