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U.S. Onshore Drilling Permit Activity 'Unprecedented' in December

U.S. land permits for oil and gas development jumped 6% from November to December, the second highest monthly permit total in 2016 and an unlikely departure for the usually slow holiday season. The accelerated permitting activity is predicted to lead to an onshore rig count that's higher in 2017 than many experts are predicting.

Onshore permits totaled 2,764 in December, which capped off a strong fourth quarter, according to an analysis by Evercore ISI. The United States did not experience the same holiday slowdown incurred in previous years, analyst James West and his colleagues said.

"For the full-year 2016, U.S. land permit totals were down 38% year/year, in line with a 43% decrease in U.S. spending, analysts said. Of the major oil and gas producing states, the sharpest sequential permit increases from November to December were in New Mexico, jumping 198%, followed by Oklahoma, 61%, and Texas, 31%. West Virginia permitting rose 17% from November.

The fourth quarter "exhibited the highest permit totals in full-year 2016," with the final three months encompassing the first period "in over a decade that permitting increased month/month (m/m) in each of the last two months -- despite a slowdown in permitting around the holiday season."

And an interesting side note: Evercore found that relative to the 10-year monthly averages, Wyoming and New Mexico exhibited the highest level of 2016 permitting in the Lower 48 states.

"The positive October-November-December U.S. land permit momentum was the first time in over a decade that permit totals improved in each of the last three months of the year, and early January 2017 permitting looks to carry the strong m/m improvement into 2017," West said. Over the week ending last Friday (Jan. 6), U.S. land permits totaled 567. "Based on this trajectory, January is on pace to eclipse the 2016 high of 2,845 permits achieved in September."

Evercore's monthly tally of drilling permit activity uses data from all major states and the Bureau of Ocean Energy Management, which require permits to be filed and approved before a new well or a bypass/sidetrack well is drilled. Overall, full-year 2016 permitting fell 38% from 2015 and was off 46% from 2009, when activity troughed following the 2008 peak.

However, because most onshore permits are issued several months before drilling begins, and offshore permits often are secured even further in advance, the rising activity during 4Q2016 posits a positive trend.

Texas, considered the touchstone for onshore activity, remains a guide for future drilling trends. Permitting, weighted to oil wells in the Lone Star State, "more than offset weakness in the natural gas states" of Pennsylvania and Ohio," West said. "Texas continues to be the single-most important state in terms of evaluating the magnitude and direction of U.S. permitting trends, although we expect states located in the peripheral shale oil basins (Niobrara, Woodford, and Bakken) to begin playing 'catch up' to Texas as operators attack incremental drilling prospects."

Modest declines in permitting activity were seen from November to December in Louisiana, down 22%, as well as in North Dakota (minus 16%), and Wyoming (minus 30%).

Positive permitting signs also were seen in the beleaguered Gulf of Mexico, where new well filings have put permitting on an upward trajectory, according to Evercore.

"The December total of 11 new permits grew 57% from seven in November, and was down just 27% from permitting in December 2015," West said. "Shallow water permitting held at two permits in December, with one new well and one sidetrack approved."

One ultra-deepwater well permit was filed in December, up from zero filed in the previous two months. Midwater permitting "showed a modicum of resilience," declining by two permits m/m to three total in December. Deepwater permits, however, "experienced the largest sequential growth, expanding from zero permits in November to five in December. New well permits grew from one in November to six in December, while sidetrack permits fell 50% to two and bypass permits increased 33% to three."

Meanwhile, shallow-water permitting saw the sharpest decline year/year, off 73% in 2016 from 2015.

"We believe that offshore drilling will continue to languish as long as shallow water permits remain at historically low levels," West said. "Offshore planning from last month suggests more GOM weakness moving forward, with just three midwater plans filed in the month of December. Overall, we remain cautious in allocating optimism to the offshore space, but permitting trends have certainly shown upward momentum over the past quarter."

In tabulating guidance and commentary from 32 public exploration and production (E&P) companies, which represent about 30% of the total rig count, Evercore expects the group to grow its rig count by almost 25% from today -- and jump 70% year/year (y/y) in 2017.

"That would suggest upside to our current 2017 rig count forecast of 705 rigs as 70% y/y growth implies a rig count of 820, while 25% growth from 640 implies a 2017 average of 790 rigs," analysts said. For reference, as a percent of the total rig count, the contribution by the 32 E&P companies today "is in line with the 2014 peak."

However, Evercore's list of 32 excludes several large Bakken Shale players, including Whiting Petroleum Corp., ExxonMobil Corp., Continental Resources Inc. and Hess Corp., as well as large diversified E&Ps that include EOG Resources Inc., Anadarko Petroleum Corp. and QEP Resources Co.

If commodity pricing is stronger, said analysts, it's likely the rig count also will rise, according to Evercore. Analysts with Raymond James & Associates Inc. expect as much, with a forecast for U.S. oil prices to reach $70/bbl this year.

According to Raymond James, this year could mark the largest growth in U.S. E&P cash flows over the past 15 years, "with cash flows and potentially capital spending both doubling," analysts said Monday. As the E&P mentality to embrace thrift comes to an end, the current forecasts are for capital expenditures likely rising 60% on the strip. They also see natural gas having its best year since 2014.

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