Is the worst behind us? Insights into the North America onshore recovery

Chaotic is the best way to describe 2020 to-date. In just a short few months, the oil and gas industry had the collapse of the Vienna Alliance talks, the full global implications of COVID-19 and the upstream industry realizing that the sort of down 2020 that they were preparing for was going to be far, far worse than anyone could have ever imagined. Our North America onshore services team joins Upstream in Perspective to discuss how the recovery is looking for the various onshore segments, including, proppant, pressure pumping, water markets and upstream activity.

David Vaucher:

I think the best way to start is really to understand what activity levels look like generally in North America. So Paula, I'll throw it to you. How exactly has activity been affected by the recent collapse in oil price?

Paola Perez Pena:

Yeah, David, well, it is not a secret for anybody that 2020 has seen a historical decrease in activity. So let's start looking at rigs. And if we look at the recount, it has struck more than 500 rigs since January, reaching around 280 rigs as of last week. That is almost 60% decrease in six months, right? So this is a huge decrease, and it will continue dropping. In fact, we expect that the second half of this year, we'll see rigs go under 200 now for the US onshore. So the drop will continue and it will reach a level that we've never seen. I remember when we first published our forecast back in April that some clients and some people inside the IHS Markit team were quite surprised that we were forecasting rig count below 300 rigs, right. And it was like, it's a huge drop, I mean, is this really going to happen? And here we are, like as of last week, as I said, 280 rigs.

So the activity has decreased quite significantly. Now we look at fractured wells. The reduction in activity has been also drastic. We went from having around 3,500 fractured wells in the first quarter of this year. And we're expecting to see a fractured well count of around 600 for Q4. So if we look at the whole year, we're expecting to see around an 80% decrease in fractured wells. So if you look at rates, if you look at fractured wells, like even frac stages, they are all seeing a significant decrease, above 50%. And then it changes based on what a specific parameter we're looking at. One thing that we need to keep in mind though, is that these accelerated reduction in activity is leaving behind DUCs. And going forward, the natural think is that operators will focus on converting those DUCs towards the end of the year, beginning of 2021.

David Vaucher:

Excellent. No, that's great. And I think, Jesus, I don't want to maybe spoil any surprises if you can really call these types of things a surprise, because I think everyone knows the answer. But definitely interested in getting your commentary on this. What region or regions do you think will be the most affected? And I think even if we maybe all can anticipate what region might be affected negatively, do you think there might be a play that represents a bit of a bright spot in comparison?

Jesus Ozuna:

Yes, David. So in general, like you stated there, the focus has been on the negative in the place, but I've seen a massive reduction in activity such as the Permian back in Eagle Ford, but there are some bright spots in North America, specifically focusing on the gas space. And most importantly, the Marcellus-Utica regions. So there we do see activity shifting over and oil field service companies shifting their activity there because the price of gases was already very depressed pre COVID-19.

David Vaucher:

Okay, excellent. That's great context. And so I think what we're doing now is we're setting the scene to say that, okay, things maybe have leveled out, but now let's look at some of the longer term implications for specific service branches. And so I think before we jump into the more granular topics if you can say that with proppant, I think Jesus, I want to stick with you and look at pumping. So we've spoken about general activity trends in North America. How exactly do you see specifically now, activity in the hydraulic fracturing market, rebounding due to an upswing? We can definitely call it that. An upswing in prices since March and then what's the outlook look like for maybe 2020 and then a couple of years after that?

Jesus Ozuna:

So the upswing in prices has provided some level of stability, mostly ranging, mostly consolidated to the E&Ps, and it provides them the stability to be able to reorganize their financials and focus on securing cashflow for paying off debt and coming up interest payments. But for the oil field service companies, and specifically for the pumping, with the high volatility in the market, there's actions that are being taken now that are independent of the price of oil. And we don't foresee those decisions that have been made, quite drastic decisions in reducing workforce, reducing budgets and costs dramatically shifting in the next three months or even nine months from now, and a couple of quarters from now because these decisions have very, very pronounced and long-term consequences. And it's not as easy to go ahead and just say, well, we fired or we let go 5,000 employees and then we're going to bring them back on immediately.

And then the prices over the past couple of weeks have started to level off and recently have begun to fall again. So there's a lot of uncertainty, a lot of volatility. We don't see the price upswing that occurred over the past couple of months, have large implications in the long-term implications and in the long-term forecast. Now, we do expect to see some activity to begin to recover in the late stages of 2021, beginning around 2Q, 3Q 2021. Once this new environment becomes the norm within the industry, we do expect some activity uptick. But for right now, for the next year, we really don't foresee any dramatic increase unless there is a black swan event that causes oil price to skyrocket. And then we might find ourselves in a different situation where pumping suppliers are scrambling to go online because of the dramatic demand.

David Vaucher:

Sure. So now, taking it one step farther down the value chain. So Brandon Savisky, you unfortunately, I say unfortunately, you have the task of reporting every quarter on a market that has been down for a long time. Right? I think this is a market that has been viewed as being distressed for quite some time that even leading up to 2020. So can you maybe just set the scene briefly for what 2019 looked like, and then also provide a picture of what we're looking at for 2020 and maybe a couple of years out into the future?

Brandon Savisky:

Yeah, gladly. I mean, you've pretty much summed it up. You don't really need to fly to a very high level to get a view. It's essentially gone from worse to horrible. And the previous bad is looking awfully good now. To add a little perspective, we estimate the annual demand degradation of roughly 64% from the end of 2019 to 2021, which, if you would look a bit further, compared to 2014 and 2015, it's a far greater disruptive magnitude in demand, which based all about 30%. And that's obviously easy to calculate, which is creative in half. The downturn in 2014 and 2016 also took about six quarters to reach its demand curve. And we expect to hit bottom in just half the time, about three months.

Now, currently on the supply side, the environment remains extremely favorable for consuming and it's nearly unsustainable for the suppliers. The market remains highly oversupplied and the shrinking demand and high supply environment has continued to suppress prices as you mentioned. And it's resulted in 10 suppliers generating minimal growth, profitable margins. I just market as continuing to emphasize the value and not only monitoring suppliers' financial health, but also collaborating and facilitating transparency with the chosen source partners, as you only hurt yourself in your own supply chain through pushing a high-risk source, the operating edges.

Listen to the team's insights in the full episode of Upstream in Perspective. Learn more about our oilfield services and materials coverage.

This podcast also referenced additional information:

• View the recent onshore webinar, Negative sentiment going into 2020 gives way to historic chaos.
• Clients can view/access the new proppant dashboard in Connect.

David Vaucher is Associate Director of Research and Analysis at IHS Markit.

Paola Perez Pena is Principal Research Analyst at IHS Markit.

Brandon Savisky is Principal Research Analyst at IHS Markit.

Jesus Ozuna is Principal Research Analyst at IHS Markit.

This article includes information from an audio conversation and has been professionally transcribed as accurately as possible. Some words or phrases may have been unintentionally excluded.

Posted 23 June 2020

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.