Upstream US Q3 earnings calls likely to focus on capex direction, rigs, oilfield costs

A grab bag of capital budgets, rig counts, oilfield costs, production trends and commodity price trajectories are likely the main topics of upcoming third-quarter US upstream earnings conference calls -- but uncertainties in outlooks for some of these topics are yielding some contradictory projections.

Upstream conference calls, from late October to early November, typically occur as oil and gas operators begin their capex planning for the new year amid a rig count that often winds down for the holiday season.

But in 2023, industry has been awaiting a rising rig count during the second half of the year -- an expectation that hasn't materialized, even with oil prices that are more than 20% higher now than at midyear.

And other uncertainties and changed expectations in recent weeks have made forecasting difficult at a time when consistent data is especially needed to shape budgets and activity programs for the new year, analysts said.

"We note broad-based skepticism around the recent move in crude above $90/b ... and tempered expectations around well cost reductions heading into 2024," investment bank T.D. Cowen said in an investor note Sept. 29.

Oilfield costs, which were assumed to drop sizably from high double-digit inflation of 2022 and which have since moderated, may be poised to climb if upstream operators' assumptions pan out, analysts say.

"Across the board ... E&Ps echoed a sentiment that lower well cost expectations for 2024 that were emerging in Q2 are less evident today," T.D. Cowen said. "Tightness in the market for cost items like labor and stickiness around service costs offsets lower costs attributed primarily" to tubular goods such as steel pipe.

Flattish capex projected

In addition, "early looks into 2024 budgets sound flattish as a baseline with a few notable exceptions" such as companies that are raising energy transition project spending and others completing major projects, the bank added.

Tortoise managing director Rob Thummel also believes 2024 capital budgets are likely to be flat to slightly up.

"I think you'll see a little bit of capex creep, but it won't be tremendous -- maybe up to 2% or so, but not significant increases," Thummel said.

What's more, oil prices are predicted more than 10% lower in the next 12 months than current levels at or near $90/b, according to the NYMEX forward curve, while natural gas prices are forecast more than 10% higher by mid-2024 than the present $2.95/MMBtu, after hanging in the low $2s/MMBtu much of the year. But the higher gas prices amount to a few dimes, not dollars, higher.

Despite higher oil prices, upstream operators have reined in spending and have been able to meet their corporate and operational goals on budgets that vary little year on year. Meanwhile, drilling and well design efficiencies have allowed oil and gas producers to modestly raise output with a flat number of rigs.

Rig counts are yet another uncertainty. According to S&P Global Commodity Insights data, the US rig count is just below 700, as 110 rigs left domestic fields in Q2, followed by another 42 in Q3. Of those, about 60% were oil-directed, 40% gas-oriented.

Rig reactivations eyed

Many analysts, as well as drillers, have predicted more rigs in the fields in 2024. For example, US land driller Patterson-UTI said in early September it had signed contracts to reactivate four rigs from its fleet and was in discussions for four more rig contracts that could be signed in Q4, while also having talks about additional rigs for 2024.

Oilfield services experts and also drillers have predicted the rig count is on the verge of bottoming soon, if it is not there already.

"In our base case scenario, we assume 75 rig adds [in] December 2024 vs. December 2023," investment bank Piper Sandler said in an investor note Oct. 1.

While the bank conceded its own oilfield services analyst is predicting just 40 land rigs to be added for that same 12-month period, Piper Sandler added: "We do not find that sufficient to hold production" for oil at the current 12.86 million b/d in Q3 2023, according to the US Energy Information Administration, much less grow to a 2024 estimate of 13.16 million b/d.

However, in the Dallas Federal Reserve Bank's most recent quarterly energy survey, 84% of 138 respondents said they expected the US' oil rig count in six months to be about flat with current levels of 568 for the week ended Sept. 20, according to S&P data -- although it was unclear if the same flatness was expected for the gas rig count (126 for the week ended Sept. 20).

Even the EIA itself recently predicted increasingly lower US unconventional production -- by 40,000 b/d to 9.39 million b/d for October, following an estimate the previous month of 20,000 b/d lower for September, based largely on rig counts that have dropped steeply in recent months.

The domestic monthly average rig count fell by 40 to 733 in June 2023, by nine in July to 733, by 24 in August to 709 and by 10 so far in September tp 699 as of the week ended Sept. 20, S&P Global rig data showed.

In any case, "a sharp rebound in US activity is required to hold production flat and keep shale from declining given the broad plateau in productivity metrics and depleting DUC [drilled but uncompleted well] inventory," Piper Sandler said.