Issue #56 | Wick Weighs In

Oilfield Water Weekly

Wednesday April 22, 2020

Although all oilfield subject matter is tough these days, you are in for a treat today because Jim Wicklund is up to bat in our Downturn Dialogue series. 

Jim has some serious oilfield bona fides. He started his career in the oilfield forty years ago as a geophysicist before transitioning to Wall Street, where he built a successful oilfield service research franchise spanning several decades of oilfield market coverage.

Last year he moved over to the transaction world as Managing Director Investment Banking at Stephens. Jim’s impact on the O&G industry at Stephens regularly involves ESG and water matters these days. He is a confirmed speaker at our postponed Oilfield Water Markets Conference, and those of you that have heard Jim speak in person before know it’s always a treat to hear his latest thoughts.

Since we can’t quite yet give him a stage and audience yet (anyone else ready for this pandemic to end?), we invited Jim to write in his latest views. Jim is every bit as great in front of a keyboard as he is in front of a microphone! Here’s what he had to say this week:

The fact that the oil and gas industry is having problems is well known at present, with Covid-19 dropping global demand more quickly than ever before – approximately 20mbopd thus far in April, with estimates of down 7.5-8+mmbopd for the year being somewhat optimistic on the pace of recovery, and supply exceeding demand such that a 9.7mmbopd cut couldn’t get WTI above $20. But the reality is that the industry was already in trouble. The world has been over-producing oil for the last 4-5 years, forcing other countries to cut production to allow for US production growth. That was never going to be sustainable, nor was an E&P universe which outspent cash flow for 7 straight years to “build value”. Covid and OPEC+ just accelerated the reality of the issue.

Globally, we need to produce enough oil to meet demand and grow that production at a rate to offset depletion and allow for any demand growth. The US unconventional markets slamming on brakes will accomplish some, with expectations of a ~2mmbopd drop by year-end. Record high storage, resulting even now in involuntary shut-ins, will be an overhang of the market and everyone knows that two men can wake up constipated and put almost 10mmbopd back on the market much cheaper than the US. As a result, oil prices will likely be sub-$40 through this year and well into next. A number of E&P and OFS companies, as well as some mid-streams, will have to restructure in order to survive, but the next owners will face the same issues – lower pricing and demand for the foreseeable future.

Natural gas is becoming relatively more popular, with production expected to decline this year with 15%-20% of production being associated gas from oil wells that will be shut-in. Gas too has issues with some spot LNG cargoes being priced equal to current Henry Hub prices, weaker demand, and global over-supply, but at least it doesn’t have the OPEC+ issues of oil and is more dedicated to power than transportation. Natural gas futures hit $3 in Jan 2021 whereas oil doesn’t hit $50 until 2029, some indication of the market expectations.

Our bottom line is that 1) the industry is critical to global life, 2) improvements in all aspects of the industry means we will likely do more with less into the future, and 3) it will take a few years to be seen. Companies need to be deciding now what they want to be when they emerge from this morass. Then they have to decide how to get there. If you don’t make it, it doesn’t matter, so do whatever you need to do to survive. Period. Consolidation needs to occur, more now than ever, but balance sheets have to be fixed before most combinations can take place. Egos are gone with the share prices and hard choices are even now being made. We will reach some “steady state” over the next few quarters but it won’t be poised for a “V-shaped” recovery but rather a thoughtful adaptation to a new reality that is less commoditized, with little to no debt, reduced capex, increased technology and automation and artificial intelligence telling us where to optimize next. There is a future, though a couple years away, and it is bright for those who adapt well.

-written by James Wicklund, Managing Director Investment Banking, Stephens Inc. – April 2020

And now for this week’s news and analysis…


News Digest

Forget Frac. EVERYONE Is Talking Storage & Shut-ins

Infill Thinking checked in with a whole bunch of our oilfield service and E&P contacts last week. All they wanted to talk about was storage and shut-ins, not frac. Here are some of the most interesting things discussed... It sounds like complete capitulation in the Lower 48 oilfield market...

With Some Operators Having To Pump OBM Into Disposal, Here's A Solution...

We've heard more talk of OBM going to disposal in the Permian lately - you simply can't give the stuff away. Gravity is offering extensive crude and oil based mud storage capacity via its inventory of crude oil storage tanks to operators in the Permian, Haynesville, and Eagle Ford and ample supply available for immediate delivery....

Parked. An Estimation Of W TX Frac Crew Decimation

With things changing rapidly and more crews hitting by the sidelines by the day (and even the hour), triangulating on how many Permian frac crews are actually still pumping stages at a given moment is not easy. Here's the latest intel on how many crews are working today...

Reducing the Risk of Shutting in Wells: Part 1

Turning the valve to shut in a well is trivial, but the implications of the decision are not. Even worse the range of uncertain outcomes skews to the negative; wells rarely become more productive from a shut-in, but they can certainly be damaged....

Reducing the Risk of Shutting in Wells: Part 2 Reserve Risk

The possibility of reducing future production poses the most consequential and perhaps the least understood threat when shutting wells in.

There Is A Bright Spot In The Gloomy Lower 48 Oilpatch [Chart Of The Day + Macro Thesis Highlights]

“Give me some good news for a change,” you say? Our pleasure! How does $3+ natural gas sound? This is a must-see chart....

ESG, Capital Access, and the Future of the Oil & Gas Industry

Over the past few years, oil and gas investors have demanded that U.S. exploration and production (E&P) companies prioritize capital discipline over growth (i.e., value over volume)...

Tapstone Energy Completes Financial Restructuring And Raises $50 million of New Preferred Equity

The Company is now positioned to expand its production base through mergers and acquisitions....

No Skid Marks – Straight Down And To The Right

The US land rig count is down 42% since MID-MARCH (the local high was only 6 weeks ago). That makes this drilling downturn the sharpest that the modern Lower 48 upstream business has ever known...

The Great Texas Oil Shutdown Has Begun

A couple hours after sunup Wednesday, Kyle McGraw climbed into his hail-beaten Chevy Suburban to make the two-hour drive from Midland to a small oil field he and his sons bought just seven weeks ago....

Oil Prices in May: Thelma and Louise?

Here is futures pricing for the May, June, and July WTI contracts over the last 30 days. What's interesting here? The divergence of May and June contracts before the plunge last Monday, a day before May expired. The prompt contract MUST converge with spot prices...

Trump Administration Stops Enforcing Some Environmental Laws In Pandemic

The Environmental Protection Agency waived enforcement on many of its health and environmental protections, offering what the agency said is relief for companies that might have trouble complying due to business operations being impacted by the new coronavirus...

Bakken SWD Fire

BNN North Dakota, LLC said an estimated 550 barrels of brine were released due to the fire on location at the J.W. Fisketjon 1 saltwater disposal well on Wednesday. The cause of the fire has yet to be determined....

Antelope And Probitas Merge

Antelope Water Management, LLC closed its merger with Probitas Water Solutions, LLC, joining forces to focus on Permian and Appalachia water infrastructure...

Recycling of Water Is Environmentalism at Cabot Oil and Gas

Cabot Oil and Gas has been recycling its water for several years and Ethan Greenley, who manages this for the company, talks about the benefits...

Paycheck Protection In The Oilfield [Chart Of The Day]

The PPP funds are trickling into the oilfield, and rightly so. Last week’s WTI flash crash should have quieted any doubt that the US oilfield worker deserves a place in the conversation for PPP relief. Here are the energy companies taking these loans...

The American West May Be Entering a ‘Megadrought’ Worse Than Any in Historical Record

A new study of ancient climate has a dire warning about today’s dry conditions..

Q&A+Water: Jon Niermann

In this issue’s Q&A, Texas+Water Editor-in-Chief, Dr. Todd Votteler, interviews Jon Niermann, Chairman of the Texas Commission on Environmental Quality (TCEQ)...

Saudi Expected To Issue Produced Water Treatment Plant Tender In Q4

Plant to treat produced water from offshore oil field...

NREL Launches $9 Million Solar Desalination Prize Competition

New Prize Competition Aimed at Increasing Access to Fresh Water Added to American-Made Challenges Network...

VIDEO: Oilfield Technology Helping Save Lives During Coronavirus Pandemic

De Nora Neptune recycles produced water and disinfects frac water by manufacturing bleach onsite. Now, they are using that same method to fill the shortage of disinfectants for the general public....

Humor: The Do’s & Don’t Of COVID-19… Clear As Frac Water…

If you are confused about the do’s and don’ts of COVID 19/ Coronavirus then watch this video... She clearly explains it all...

And In The Land Down Under... Study Finds No Environmental Impact From Fracing

A comprehensive three-year scientific study into the air, water and soil impacts of hydraulic fracturing (HF) in coal seam gas (CSG) in Queensland, Australia has found little to no impacts on air quality, soils, groundwater and waterways....

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