The Market Outlook For Oil Services Companies Has Become Even Uglier

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Includes: BNO, CLR, DBO, DTO, DWT, NRGD, NRGO, NRGU, NRGZ, OIH, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, SCO, SZO, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU
by: Robert Boslego
Summary

Oil rig count peaked in November 2018.

But Permian well completions and production continue to rise.

There has been a remarkable gain in shale drilling efficiency.

CLR is seeing production gains with 37% fewer rigs.

Oil servicing company prospects have become ugly.

The U.S. Oil Rig Count most recently peaked at 888 in this cycle for the week ending November 16, 2018. Since then, it has dropped to 770 in the week ending August 2nd.

Much has been made of the fact that the rig count is dropping in terms of U.S. crude production levelling off. However, there have been efficiency gains that have more than made up for the drop in the rig count.

Continental Resources (CLR) recently stated in their 2Q19 earnings call that:

Our crude oil production growth is running ahead of schedule and we expect average production for the year to be in the upper-half of our original guidance. We have also achieved the efficiencies throughout the first-half of 2019 that will allow the reduction of drilling rigs from 19 rigs in SCOOP STACK to 12 rigs on early fourth quarter of 2019. This 37% reduction in our southern rig fleet was made possible by the step change in performance from our Springer and Woodford rig fleets in Project SpringBoard. I am proud that our teams can exceed production estimates with lower rig activity, that is operating and capital efficiency at its best.”

CEO Harold Hamm also opined that “we're probably 100 rigs more U.S. than is needed today.” And the work is being done by far fewer workers, according to new studies. The number of fracking crews is down 20 percent from last year in the Permian Basin.

Yet, completed wells set a new record in the Permian in June at 507.

And crude production in the Permian reached an all-time high of 4.206 million barrels per day.

At the same time, the number of “drilled but uncompleted” wells (DUCs) also set a new high record of 4,002.

"This latest batch of fracking activity confirms our belief that prospects look promising for U.S. shale production in the second half of the year," said Oleksii Shulzhuk, senior analyst on Rystad Energy's shale team.

In the latest Short-Term Energy Outlook (STEO) for August, the Energy Information Administration estimated that U.S. crude production will continue to ramp-up over the balance of 2019 and in 2020.

The U.S. is projected to exit 2019 at 12.95 and to exit 2020 at 13.62 million barrels per day.

OIH

The new efficiency of shale oil is bad news for drilling services companies. The VanEck Vectors Oil Services ETF (OIH) provides exposure to a portfolio of oil servicing companies.

It closed August 7th at $12.14, its lowest point over the past 52 weeks, and less than half of its value in October 2018. If oil prices continue to crater, it will suffer as its prospects of lower drilling activity are priced in.

Conclusions

Investors with the capability of shorting the ETF should consider OIH a short. And investors with long positions in the oil services companies should consider exiting their long positions.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in OIH over 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.