Email of the day on the ground experience from the Texas panhandle
Comment of the Day

September 12 2017

Commentary by Eoin Treacy

Email of the day on the ground experience from the Texas panhandle

I had the pleasure of spending several days with a friend who is an executive in a drilling company. He indicated that the recovery had brought a boom in drilling, but that customers were demanding the latest high-tech drilling rigs (faster, more efficient, much bigger pumps, able to drill longer laterals). This requires very large capital investments with uncertain payback times. Older, lower tech rigs are left unused, which creates dramatically lower rig utilization rates for drillers. Unfortunately, the past month has seen a bit of a slowdown, with some new tech rigs coming off of pads with no new contract (meaning the rig goes to the yard and sits, and the crew have no jobs). While this may be a short-term issue, it could alternatively be a sickly-looking canary.

Unlike last year, when vast numbers of pump jacks were idle (indicating the well is not producing at that moment), this year more than 75% of the pump jacks I saw were pumping, and most looked well-maintained. Pump jacks do not normally pump full-time, as they shut down for maintenance, and when their storage tanks are full, etc. A lot of the oil in the area is pumped into tanks and then picked up by trucks. 

The beef, pork, chicken, and nuclear weapon businesses all appeared to be thriving.

Probably needless to say, but the Texas Panhandle is about 700 miles from the flooding.

Eoin Treacy's view

Thank you for this trip report which I’m sure will be appreciated by subscribers. Relatively low prices, at least compared to a few years ago, put pressure on services businesses to employ the most sophisticated technology which requires fewer people and more capital. That benefits larger companies with the financial heft to prosper while it is likely to have a negative effect on smaller operations. 

Back in January and February it was possible to sell production forward at close to $60 out to two years. What we do not know is how many companies took advantage of that opportunity. I wonder if what we are now seeing is potentially the rolling off of some hedges after what has already been more than six months and therefore greater sensitivity to pricing. That could explain the downtick in activity and the subsequent uptick in prices. 

West Texas Intermediate crude oil still exhibits a progression of lower rally highs but has spent more time in the region of the latest high than following other rallies. Nevertheless, a sustained move above $50 will be required to signal a return to demand dominance beyond short-term steadying. I was shaken out of my long on Friday but with the price in the middle of the six-week range I am slow to open it again. 


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