Clay Williams - CEO for NOV Comments
We have been talking a lot about Permian loss of Tier 1 and overall difficulty in North America to increase shale production. NOV reported earnings today and I thought it would be beneficial for the board to see his comments with respect to North American shale.
For those not familiar with NOV, they are an oil field equipment manufacturer that has a lot of market share in both on and off-shore drilling and production OEM equipment. Clay has a keen insight across the entire oil production business and day to day issues as seen by drillers and fraq companies.
He is not optimistic that the US will be greatly increasing production of oil this year, for reasons you see in his comments. Also, please note that while he also talked a lot about the off-shore business, I have elected to confine this post to their North American business.
But now, let’s talk about North America. Our consolidated revenues from North America land customers increased only 1% sequentially. After rising sharply in the first part of the year, U.S. rig count now found a near term ceiling, a touch below 800 rigs constrained by among other things the availability of labor. North American E&Ps are citing service availability as the biggest risk to achievement of their production targets. But our oilfield service customers tell us that crew availability is the real root cause. U.S. oilfield wages in West Texas and North Dakota are up 20% to 50%, along with higher per diems, higher oil based mud bonuses, higher overtime as crews that are chronically shorthanded and they work extra hours to cover the unfilled positions. But new hires are hard to find, and the crews that are successful in hiring new green hands are less safe and demonstrably less efficient.
$4,000 per ton casing is another constraint, and it’s contributing to 40% higher cost per foot for E&Ps. Dwindling Tier 1 drilling location inventory in the reversal of double digit well productivity gains in terms of barrels per foot of lateral that fueled the rapid run-up in U.S. shale production several years ago are also emerging as constraints to production growth. And like the international markets, capital is scarce and expensive. Even the rising equipment utilization across North America in 2022 brought mercifully higher pricing, enabling land drilling contractors and pressure pumpers to begin earning much improved returns on capital, the industry is hesitant to invest.
For instance, U.S. high-spec land rig day rates around $40,000 a day can generate 20% capital returns on new build rigs for efficient contractors. However, new capacity editions so far have been scarce owing to capital, labor and supply chain constraints.
On the other hand, pressure pumpers are cautiously investing in frac fleets given the higher wear and tear that simul fracs and 24/7 operations are placing on their spreads. They see the need to replace equipment they’re consuming every day at accelerating rates. It doesn’t hurt either that the returns on new frac fleets are approaching 40%. Importantly, though, they are self-funding these investments. This is external capital is still very difficult to access. Given the myriad of constraints 2022 has exposed, it’s no surprise that year over year U.S. production growth fell well short of the 2016 to 2019 era, and even fell short of greatly reduced expectations despite a massive drawdown in DUC inventory.
Now, add to the constraints I mentioned, the emerging North American gas oversupply caused by constrained LNG export capacity out of the U.S. and rising gas oil ratios in shale basins as they mature, and we foresee additional pressure on E&P economics and diminishing urgency to drill in North America. Higher pricing across the board will likely still lead to an overall increase in year-over-year E&P spending, but our outlook for 2023 North American land remains a little cautious in contrast to offshore and international land markets where investment urgency, utilization and pricing are rising. Longer term, we’re bullish on all basins in all areas, including North America, as a serious global structural shortfall in production becomes more evident.
This returns me to where I started. Constraints are everywhere in this industry. Years of limited exploration and reserve replacement now restrain the industry’s ability to ramp production quickly as the pipeline of developments has dwindled. FIDs in 2020 and 2021 are down 80% from 2009 peaks. Nevertheless, this is beginning to change. The events of 2022 taught us just how crucial the capital-intensive industry we serve is. Oil and gas is the industry that powers all other industries. Our way of life would not exist without it.
Every upcycle shares some common trades. The cutting of maintenance expenditures and laying off of hard-working oilfield employees during down-cycles creates an urgent need to rebuild capabilities and teams and iron as we first enter an upcycle. But never before has this industry faced the constraints we face today. From raw materials to finished components to workforce to freight to availability of capital to higher interest rates to hostile political pressure and tightening regulations, pivoting back to growth will be as daunting as it ever has been throughout the industry’s 164-year history. I’m convinced that these extraordinary constraints will elongate this upcycle. They will take many years to overcome. But we simply must overcome them to restore the critical energy security required for economic growth and improving standards of living, particularly for those living in energy poverty.
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|Msg #||Subject||Author||Recs||Date Posted|
|480883||Re: Clay Williams - CEO for NOV Comments||johnnyironboard||31||2/7/2023 4:54:37 PM|
|480887||Re: Clay Williams - CEO for NOV Comments||old_doodle_bugger||19||2/7/2023 5:00:51 PM|
|481076||Re: Clay Williams - CEO for NOV Comments||certiatori||5||2/8/2023 12:06:59 PM|