BH Rigs Week of Aug. 31: Collapsing Frac Spread Counts

  • This week marks a psychological turning point in the oil cycle
  • Total oil rigs rose, +2 to 862
  • But horizontal oil rigs declined, -1 to 765
  • The 4 wma change for horizontal oil rigs rose to +2.25 / week due to technical factors.  Next week will likely see a decline on a 4 wma basis.
  • Horizontal oil rigs have gone exactly nowhere in the last 11 weeks at WTI averaging above $68 / barrel.
  • Under $68 WTI, the horizontal oil rig count is unlikely to rise further (although oil production will continue to increase at current rig numbers).
  • This week again saw a material pullback in frac spread counts, -7 to 433.  Since June 15th, frac spreads have fallen by 47 (-10%).  This appears to be linked principally to transportation bottlenecks in the Permian.  Operators are struggling to get the oil to market and are therefore reducing well completion activity.
  • Aligning rig to frac spread counts would require a reduction in the horizontal oil rig count by 65 to 700.  While such a steep fall does not look likely at this point, it seems quite likely that the rig count will roll off, and perhaps materially.
  • Investors are beginning to appreciate that reviving rig count growth will involve moving to the next level of oil prices, and the back end of the futures curve is swinging up accordingly.
  • It is not yet the beginning of the end, but to appearances, shales have reached the end of the beginning.