Rates of return drop in most US basins this month yet rig counts rise

Internal rates of return have fallen this month across both oil and dry gas basins in the US, yet the rig count has increased steadily throughout December despite lower commodity prices.

The average 12-month forward curve for the US domestic crude price benchmark, West Texas Intermediate, decreased by $4.93/b in December, to $70.29/b. Returns within the major oil basins fell as a result. Three plays, the Permian Delaware, Eagle Ford and Bakken, hold IRRs just below 50%, according to S&P Global Platts Analytics.

The dry gas basins also declined this month, as the average 12-month forward curve for Henry Hub settled at $3.74/MMBtu, a decrease of 40 cents/MMBtu. The Marcellus Wet has the highest return of any of the gas basins at 45% IRR. The Utica Dry, Marcellus Dry and Haynesville are all above 30% IRR.

Platts Analytics' IRRs are based on a half-cycle, post-federal corporate tax analysis, which excludes sunk costs such as acreage acquisition, seismic and appraisal drilling.

Rigs are up this month by roughly 20, with the rig count exceeding 700 active rigs. Rigs in most of the major US basins have increased throughout the fourth quarter of 2021. The addition of rigs is expected to continue to steadily rise into 2022, according to Platts Analytics.

Looking at some of the major basins, the Permian gained the most rigs during December, increasing by an average of 15. The Bakken and the Eagle Ford both decreased by an average of one rig this month. On the gas side, the Marcellus increased by an average of three rigs, while the Haynesville and Utica both held steady.

Despite commodity prices falling over the last two months, operators have experienced strong commodity prices all year. The year-to-date WTI price has averaged approximately $70/b and averaging around $4/MMBtu. Year on year, WTI and Henry Hub are nearly double what they were in 2020, and that has been what spurred steady increases in drilling and completion activity this year.

However, as opposed to previous price spikes, operators have remained much more committed to capital discipline and appear poised to stick to this strategy in 2022.

US total natural gas production is forecast to continue to grow through 2022, averaging 94 Bcf/d, which, if it holds, would be just under a 3 Bcf/d increase year on year, according to Platts Analytics. The growth is driven by the overall higher oil and gas prices expected in 2022, however takes into consideration the continuation of producer's capital discipline.

Most of the growth will be concentrated in the Permian and Haynesville basins. The Permian is forecast to average 14.6 Bcf/d in 2022, an increase of nearly 1.5 Bcf/d while Haynesville production is forecast to average 14.1 Bcf/d in 2022, an increase of 1 Bcf/d from 2021 levels.

The recovery in US crude supply is set to accelerate in 2022, with production forecasts to exit 2022 up nearly 1 million b/d compared to end-2021 levels, according to Platts Analytics. Still, this remains just shy of pre-pandemic levels, which are expected to be reached in early 2023.

Merger and acquisition activity in the US has been strong throughout 2021 and is another signal of the focus on discipline. This should support longer-term growth as merged companies become leaner and benefit from synergies related to contiguous shale acreage.