Oil at $50: Time to drill, baby, drill?

(AP Photo/Ana Maria Otero, File)
AP/Ana Maria Otero

Oil closed above $50 a barrel in New York for the first time in 10 months and U.S. production has fallen to the lowest in almost two years. Time to drill, baby, drill?

Investors are getting excited. The Philadelphia Oil Services Index jumped the most in seven years Monday, and energy producers in the S&P 500 index rose to the highest since November. Helmerich & Payne Inc., the biggest drilling-rig contractor in the U.S., said it’s starting to get calls from exploration customers.

“After two years of just ugliness in the oil markets, I think people are feeling good that we’re past the bottom,” said J. David Anderson, an analyst at Barclays in New York. “Now the eyes start turning toward the rate of the recovery.”

In New York, oil was trading at $50.95 a barrel, up 55 cents, at about 9:40 a.m.

Oil companies are slower to jump in. A month ago, fracking standard-bearer Continental Resources Inc. was already eyeing $50 as the trigger for stepping up activity. At that level, the company would have enough cash to do more than just pay debts and could begin finishing already-drilled wells; by $60, Continental would consider deploying more rigs, CFO John Hart said.

The recovery will look different than the freewheeling days of the shale boom, with fewer companies with available cash leading the charge, in the regions that have the best prospects and lowest costs, according to Rob Desai, an analyst at Edward Jones in St. Louis. The Permian Basin of West Texas, where production barely slipped during the slump, is already seeing a return of drilling rigs. Not so just yet in places such as the Eagle Ford in South Texas and the Bakken in North Dakota.

West Texas Intermediate crude rose to a 10-month high of $50.36 on the New York Mercantile Exchange Monday, up almost double from a 12-year low in February. Last week explorers boosted the oil rig count in U.S. basins for just the second time this year, according to Baker Hughes Inc. The bottoming of the rig count in the second quarter confirms what many were expecting, Anderson said.

Even if drilling picks up, it won’t mean more oil right away. The Energy Information Administration estimates U.S. output will drop to 8.1 million barrels a day in the third quarter of 2017 from 9.2 million in the first three months of this year.

Maintain Gains

Oil prices will need to hold in today’s current range of the high $40s to low $50s for about 60 to 90 days to give companies confidence to slowly restart activity, said James West, an analyst at Evercore ISI. If they do, there’s “clearly a lot of capital that people would like to deploy into the oilfield.”

Roughly two-thirds of all exploration and production companies recently surveyed by West and his Evercore team said they’d boost spending by more than 10 percent in the second half of this year if oil is between $50 and $55, he said.

Independence Contract Drilling Inc., a Houston-based rig operator that leases gear to drillers such as Anadarko Petroleum Corp. and Devon Energy Corp., has recently seen a four-fold increase in queries from oil companies about pricing and availability, Chief Executive Officer Byron Dunn said during RBC Capital Markets’ energy conference in New York on Monday.

If prices remain at or above current levels, oil explorers probably will begin deploying more rigs as soon as next month, Dunn said.

Still, producers are wary. Last year, prices rallied more than 40 percent to trade around $60 for two months, only to slide in the second half of the year.

Holding Steady

Matador Resources Co. plans to keep running three rigs in the Permian for the remainder of this year, the company said Monday at the RBC event. If crude holds above $50, Matador would consider adding a fourth rig later in the year. Oasis Petroleum Inc. is reluctant to accelerate drilling until prices are in the $50-$60 range for a prolonged period. When Oasis does step up activity, it’ll finish already-drilled wells before starting fresh drilling, according to a company presentation.

Ramping up drilling may be hampered after the departure of thousands of seasoned engineers, geologists and technicians in the past two years as workforces were slashed to cope with plunging prices, Toby Darden, co-founder of Vermilion Cliffs Partners, a closely-held explorer in the Permian, told a Hart Energy conference in Fort Worth, Texas, on May 24. “Now we’re seeing a little light at the end of the tunnel on the price side.”

For Continental, the creation of billionaire wildcatter Harold Hamm, every $5 increase in WTI adds $150 million to $200 million in cash flow, according to company figures. Dispatching fracking crews to tap half-finished wells in the Bakken is a cheaper way of lifting production than drilling fresh wells.

All of that isn’t slowing down shareholders.

“Investors are starting to take a bit more risk out there,” Anderson said. “If oil prices stay in this range for the next 2 weeks, I think you’ll finally see investors say, ‘Hey, it’s sustainable now.’”