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North American Onshore Rig Count, Prices Likely Strengthening Through Year, Says Evercore

North America’s onshore rig count remains strong, with an estimated 100 more rigs likely to be raised through year’s end, Evercore ISI said Monday.

During a webinar, James C. West outlined the findings by his team during an annual forum last week in Houston. Analysts met with 40 oilfield service (OFS), equipment and drilling companies they cover.

The OFS sector is undergoing a “once-in-a-lifetime” evolution as the old guard falls away and advanced technology, digitization and efficiencies evolve, West said.

“After a truly monstrous downturn, which led to a sea change in industry dynamics, a global land upturn is finally underway and an offshore bottom looms.”

The biggest operators are “ushering in major technology advancements and digitizing a historically analog business...Smaller companies are driving change through efficiency advancements in a business notoriously apprehensive to change. Both large and small players are emerging leaner and meaner. This is a restructuring on a global scale.”

A “fourth industrial revolution has arrived in the oil patch, and this time the threats are somewhat existential.”

The OFS sector still has to face up to the risks to the “oil age,” and to do that, operators and contractors have, like their exploration and production (E&P) brethren, become returns-focused. They are using digitization across the sector to improve efficiencies, and utilization, and they have lowered spending across the supply chain.

“It's a fascinating sight to witness and to expound upon as the oil business fights back with a vengeance against decades of disruption,” West said.

Following the discussions with OFS operators, Evercore is predicting the sector should have more pricing power this year as demand in key markets bumps up against a “persistent undersupply” in pressure pumping, high-spec land rigs and drilling tools, among other things.

For pressure pumpers, the North American turnaround “evolved so voraciously that supply chain bottlenecks and budget exhaustion were very much felt in the 4Q2017 numbers, but the space was not uniformly affected,” West said.

Pricing for land-related services should grind higher, although at a slower pace than in 2017. However, there have been first quarter “weather challenges,” which hampered wellsite activity and sand rail transport that should impact results.

Meanwhile, the onus is on the sector to build for mid-cycle activity, not only peak activity. Certain product lines are nearly sold out, but a level of capital discipline remains among the North American operators.

The OFS operators have internalized the returns-focused mentality espoused of late by the exploration and production (E&P) sector, “and the market is clearly calibrated to this mantra,” said West.

Companies are walking a fine line about how they handle higher prices and/or adding capacity.

“While the OFS sector was brutally beaten down by pricing concessions through the downturn, the North American contingency is understandably weary of the impact that budget exhaustion can make in terms of quarterly lumpiness,” he said.

Beyond the shortfall in fracturing (fracking), the sectors like directional drilling and downhole drilling/completion equipment is undersupplied “by a wide margin,” both from manufacturing bottlenecks and labor constraints.

Even though higher price books were rolled out by North American operators during January, there likely will be a measured approach to lifting prices on E&Ps this year.

“The rig count continues to grind higher, which due to multiplicative intensity effects has an outsized-positive impact on the rest of the OFS value chain,” West said. “This should lead to higher pricing, particularly for...wireline, well servicing, rentals, consumables...that perhaps lagged the completions-related pricing push of 2017.”

The Evercore team continues to struggle in rationalizing “how aggressive shale growth production can be achieved” on current E&P budgets.

“It seems that this view has been wrongfully predicated on the implicit notion that OFS companies will underwrite production growth via sustained downturn-level pricing, unbridled capacity growth agnostic of OFS returns and smooth-sailing with regards to logistical bottlenecks and input cost inflation,” said West.

“The conversations from E&P participants at our conference cast significant doubt on the viability of that ‘Goldilocks’ scenario.”

Evercore’s E&P analyst Steve Richardson said the industry is absorbing higher well costs and a steady stream of “flattish” 1Q2018 volume growth from the Permian, which as the most active basin the country, could indicate risks to E&P outlooks.

That makes Evercore’s team “dubious” of E&P targets based on current spending guidance.

“Overall,” said West, “our impression is that the E&P industry is walking down 1Q2018 production volumes under the guise that issues will prove transitory, and correspondingly trying to reposition focus on a presumed second half 2018 production ramp.”

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