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Domestic Oilfield Spending Faster, More Furious, Says Raymond James

U.S. oilfield spending and activity this year is "fast-er and furious-er" than predicted by analysts at Raymond James & Associates Inc., with exploration and production (E&P) cash flows now forecast to be 30%-plus more than in 2013.

J. Marshall Adkins, Collin Gerry and James M. Rollyson now expect to see U.S. E&P spending this year to be 10-15% higher than in 2013, a boost from predictions in September (see Shale DailySept. 25, 2013). Higher E&P spending would translate into a 15% gain for oilfield services, said the trio.

"So far this year, the oilfield spending/activity has not only increased but it has been 'fast-er and furious-er' than even we had expected," said the analysts. "The combination of higher U.S. production, stronger gas prices and lower costs now leads us to believe 2014 U.S. E&P cash flows will increase by over 30% versus last year.

"Additionally, we now expect those higher cash flows to translate to a 2014 U.S. oilfield spending increase of closer to 15% versus our prior estimate of up 5-10%."

Investors are underestimating E&P "industry" cash flows and how much those surging cash flows may impact U.S. oilfield activity, particularly horizontal wells drilled using hydraulic fracturing (fracking), they said.

"Hint: we now estimate U.S. footage will increase 15%, horizontal wells increase 20%, frack horsepower demand rises 10% and the frack stage counts increase 30%."

Last week the analysts revised the U.S. rig count higher and said horizontals should increase by 11% (see Shale DailyFeb. 18).

One of the most "misunderstood and confusing" issues facing oilfield investors today is the disconnect between bottom-up E&P spending models, top-down cash flow models and oilfield activity metrics, they said. If last year's results from publicly traded E&Ps are reviewed, they show strong production growth and stout cash flows from drilling.

This spending surge should have led to a big jump in drilling activity. But it didn't because there were fewer active rigs, all because of better technology and a turn to drilling more efficient -- not more -- wells.

The Raymond James crew conducted a top-down study of domestic explorer cash flows versus spending. The methodology looked at year/year changes in average U.S. energy prices, total production volumes and overall well costs.

"To double check this seemingly impossible feat, we did a "top-down" study of U.S. E&P cash flows vs. spending. As opposed to the "bottoms-up" approach, this methodology simply looks at year-over-year changes in average U.S. energy prices, total U.S. production volumes, and overall well cost changes. The top-down review "confirms both a large 25% surge in 2013 E&P cash flows, as well as a modest decline in overall industry spending.

"By the way, this was the third time in the last decade that the U.S. E&P industry has underspent cash flows," the analysts said. More important, "our current estimates for 2014 show another likely under-spend year with U.S. cash flows up over 30% and spending up only 15%."

The big surge in domestic cash flows will lead to a "much brighter 2014 for North America-based oil services companies," said Adkins and his colleagues. There were "some positive oilfield indicators" last year on footage, horizontal drilling and frack stages, but it was a "tough year all around for oil service...

"Moving into 2014, we now expect the rig count to be up modestly (2.5%) but the horizontal rig count (and driver of most service activity) to be up a robust 11%." The leading edge dayrates for newbuild joystick AC rigs likely is to remain strong, with a tightening market for high-end products that spill over into the  Leading edge dayrates for newbuild “joystick” AC rigs should continue to remain strong and the tightness in the high-end market to spill over into the higher-end SCR, or silicon-controlled rectifier rigs.

It's not just Raymond James that appears to be expecting higher returns for the services sector. On Sunday Chesapeake Energy Corp. disclosed plans to sell or spin its diversified oilfield services unit, whose revenues in 2013 were $2.2 billion. Chesapeake Oilfield Services (COS) was created in 2011 to handle drilling, fracking, oilfield rentals, rig relocation and fluid handling/disposal (see Shale DailySept. 20, 2011). The stand-alone unit could be valued at $4 billion-plus, analysts said.

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