AustinAg008 said:

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Natty at $6.00 going into the summer....

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LFG!

Natty up another 4% this AM....

I'm loving this.

AustinAg008 said:

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Natty up another 4% this AM....

I'm loving this.

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Does any of this make sense? Short positions requiring coverage? This run up does not make sense to me.

Corporate greed....

PeekingDuck said:

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Are you joking? I honestly can't tell.

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I am not. Gas has been relatively stable considering other commodities. In 3 months, from the beginning of winter until Spring, we went from sub $4 to mid $6 yesterday. 50+%. Oil from $80 to $100 over the same span, so 25%. Oil is more of a worldwide commodity that should be more subject to movement from the Russian invasion. Yet gas is up more than twice oil. I'm sorry, but weather and inventory levels just don't explain it.

All of the Baltic states have stopped imports from Russia (small markets, yes, but it's opportunity) and the Canadians just authorized the start of a new offshore project specifically designed to be a long term offset for Russian gas in Europe. There will be export opportunity from this that haven't existed previously. I'm convinced part of the Russian strategy was based on a bet that EU energy dependence would deter any major sanctions or participation in the war. It clearly has not. I'm guessing energy security is going to be a major theme over the next decade in the EU.

Why is it falling to pre war levels? What has changed?

We've kicked this around some recently on this thread, but I think just about anyone in the industry has interest in this:

Why is the North American rig count so low? Historically, when the oil price is above $80.00 wti, we see, on average, 17 rigs per dollar of wti oil price. As of Friday, we are sitting around 6.3 rigs per wti dollar. That is off the charts low. Especially considering the positive momentum coming out of the pandemic, underutilization of existing resources (people / equipment), basically the weaponization of the energy industry worldwide, etc...

Some reasoning we have touched upon include financing hurdles, increased government regulation / reach, commodity input shortages (ex. drill pipe), capped well backlog, etc...

Considering all of the above reasons, something still doesn't feel right. I continue to check the Friday Rig Counts expecting a significant jump and it isn't happening. In the past folks would be tripping over themselves to put people / equipment to work.

What do you think is keeping the lid on North American activity?

PeekingDuck said:

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There are labor shortages, material shortages, and promises made to NY that have to be kept.

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100%. Even if companies wanted to get another rig and had funding, it would be hard to source everything needed to make it happen this year. And if you could source it, costs would probably be 50-100% higher than what you're seeing on current contracted services.

A lot to companies are still focused on paying down their debt. It seems like everybody is playing follow-the-leader here. I think once some companies increase their capital spend the others will follow.

Literally billions of invested capital was torched in last drilling environments.

That and ESG means PE and funds and banks are not in the sector like they once were. In addition investors want to see cash returns (dividends). If you propose a significant CAPEX increase now your stock will be punished by investors.

Or you might be taken off the DOW and have your credit rating hit for no real reason.

Gas exports (from US) can not meaningfully move. LNG is at capacity, and may be able to move 10% (it's less than 15% of demand anyway). I'm just not seeing the macro market justify this price. The price of gas is local in the US and it should be based on local supply/demand factors.

I agree with all of this and Peeking makes a valid point that the political headwinds are stronger than ever. My reservation comes in working with some of the largest land based domestic operators. Their equipment budgets have, on average, tripled over 2019 (in some cases much more). Our OEM manufacturers are keeping up, but they are told that volumes will increase each quarter this year. While companies are conscious of their dividend, capital expenditure is booming as if we have 1700 active rigs. I understand that getting to 1800 rigs is a pipe dream, and even considering all the excellent points mentioned above, I don't understand why we aren't hovering around 900 or so rigs.

BCG Disciple said:

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Gas exports (from US) can not meaningfully move. LNG is at capacity, and may be able to move 10% (it's less than 15% of demand anyway). I'm just not seeing the macro market justify this price. The price of gas is local in the US and it should be based on local supply/demand factors.

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LNG is at capacity and it would take a few years and a few billion $ to increase that capacity.

Yeah, I don't really believe we'll have meaningful export increase either and you would think the market makers wouldn't believe that either. Maybe they think end of chain product cost increase (chemicals, plastics, etc...) will drag natural gas along? I have no idea. Seems like a cart before the horse thing to me.

MJ20/20 said:

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I agree with all of this and Peeking makes a valid point that the political headwinds are stronger than ever. My reservation comes in working with some of the largest land based domestic operators. Their equipment budgets have, on average, tripled over 2019 (in some cases much more). Our OEM manufacturers are keeping up, but they are told that volumes will increase each quarter this year. While companies are conscious of their dividend, capital expenditure is booming as if we have 1700 active rigs. I understand that getting to 1800 rigs is a pipe dream, and even considering all the excellent points mentioned above, I don't understand why we aren't hovering around 900 or so rigs.

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I can say for my company, the material supply issues alone would keep us at our current pace even if all the other issues were gone. As we stand right now we are already having to run the frac crew slower than we could to keep from running out of sand, and I on the facilities side am just barely keeping up due to delays on anything involving large amounts of steel. I've heard from our drilling guys that they wouldn't be able to get enough casing to keep up with adding a rig basically regardless of the price.

Awesome info. Thanks. Pipe casing is going to be a problem for sure. A friend of mine runs a large casing plant and they are trepanning (boring process) solid bar to make some sizes due to lack of tubing. It's an inefficient process that is slow and costly compared to standard procedure. They are operating at about 40% of 2014 capacity, mainly due to lack of raw material.

We're having to be much more flexible on pipe selection. Subbing grades and diameters for what's available on repair and reroute work.

Good point on efficiency. If you were to estimate the increase from 2014 to today what do you think it would be?

Analyzed this recently within our company. EIA releases a productivity report that essentially states just that. For example, today's Permian rig produces 6x more oil per day than one in 2014.

https://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf

That production/rig would be skewed some as companies ran through DUCs last year but rigs have certainly became more efficient over the years.

Efficiency doesn't tell you what you need to know.

Rigs might be able to drill in two weeks what used to take three weeks. On its face, that's better. But the cost to drill might have increased proportionally.

And for some operators getting more wells in production just gets them closer to insolvency.

The major move is the shift change from vertical drilling to horizontal.

I understood there to be several expansions underway that will increase export capacity by 1.5 bcfd + by yr end . I'm don't claim to be an expert on this but it has been discussed here in the past few weeks .

Not much beyond that b4 2027 .