Strong drilling permit growth so early in 2018 points to “substantial” outspend by the exploration sector yet again, Evercore ISI analysts said.
Plotting year/year (y/y) growth in both U.S. permitting and spending by exploration and production (E&P) companies “paints an interesting picture of what is potentially ahead if permit growth continues at the current cadence,” said James C. West and his team in their recent drilling permit report.
Since 2006, the y/y delta in permitting has correlated 93% with E&P spending growth, West said. As of late March, domestic permits have averaged 41% higher than a year ago, and they were up 53% in January and 30% in February. Evercore had projected only a 15% uptick in U.S. E&P capital expenditures (capex) this year.
“Upward pricing pressure and persistent oilfield services undersupply suggest that E&Ps will need to outspend to hit development targets, but this divergence is unparalleled when looking at historical capex estimates versus actual results,” West said.
More privately held E&Ps proving up acreage, while the supermajors are hunting for short-cycle production, which may explain some of the “permit surplus” he said.
However, “we are incrementally more certain...that cost inflation will force operators to rationalize aggressive production growth against what will likely be a robust outspend” from stated guidance.
“In a chicken or the egg debate whether permitting leads spending or vice versa, clearly 2018 permitting is likely to lead the capex blowout.”
Through March 16, U.S. land permitting stood at 3,445 with the four-week rolling average of 1,064 off from the multi-year high of 1,130 in mid-December. A 120% increase in Wyoming permitting drove the recent week/week improvement.
The four-week rolling permit/week run rate “implies a March total well above 5,000, “which could shatter the 2017 high of 4,945 in December and test the November 2014 watermark of 5,384,” West said.
The growth in permits may be indicative of a U.S. land market that is becoming “increasingly comfortable” with the outlook for oil prices. It also suggests that E&Ps may be looking to increase spending beyond drawing down their hefty uncompleted well inventory, West said.
U.S. land permits totaled 4,173 in February, 30% higher y/y and up 8% from January’s 3,870, according to a tally by Evercore of land and offshore permits compiled from all major energy states and filings to the Bureau of Ocean Energy Management. Most onshore permits are issued several months before drilling begins, and offshore permits often are secured even further in advance.
During February there were weaker permit numbers in Oklahoma, down 23% from January, and from West Virginia, where permitting fell 11%. However, the declines were more than offset by gains in New Mexico, up 46% month/month and Louisiana, which was 24% higher.
Texas permitting, considered the national bellwether, was flat in February on the back of a 5% increase in January. With half of the working U.S. oil rigs, Texas sets the pace in “terms of evaluating the magnitude and direction of U.S. permitting trends,” West said.
Overall and for the second straight year, February permitting improved sequentially and y/y, according to Evercore.
“Budgeting clearly has an incremental growth focus for the broad majority of domestic operators,” said analysts. “While we are still early in 2018, if the January/February y/y out-performance continues at the current clip, the 43% growth in U.S. permitting for fiscal year 2018 will vastly outpace our projected 15% increase in spending growth, and will also fall just 15% shy of the 2014 peak.”
The U.S. rig count has begun climbing again, and the sequential permitting increases strengthen Evercore’s thesis that domestic drilling should outperform market expectations over the next four quarters.
Meanwhile, Gulf of Mexico permitting has continued to be slow, but y/y improvement is measurable, said West. In February there were 13 permits issued, 63% higher y/y but down from 17 (24%) in January.