Lower 48 well completion activity is at an all-time high, even as the rig count has fallen, which is leading to a huge disconnect that may not be sustained through 2020, according to an analysis by Raymond James & Associates Inc.

Analyst John Freeman and his team in a note to clients Monday said investor fears that a falling rig count will not translate into reduced completions because of an ample drilled but uncompleted (DUC) well inventory is based on an incorrect assumption that the DUC count could return to the lows of 2016.

However, onshore completion activity “is at an all-time high,” Freeman said. “As a result, operators are going to naturally require more inventory to continue running efficiently at an expanded pace.”

The switch to pad drilling, building more wells per pad and optimized fracture (frack) crews have increased the “months of inventory” required to efficiently drill wells to four months from the historical level that was closer to two months.

The U.S. Energy Information Administration (EIA) may be overstating monthly DUC data because there are “hundreds” of “lame DUC” or “dead” wells drilled years ago that probably will never be completed, Freeman said.

“We estimate that the EIA DUC data is overstated by almost 15% (or about 1,200 wells). Even assuming the EIA count is correct, the current disconnect between completion activity and drilling is the biggest we've ever seen and cannot be sustained through next year.”

DUCs may “reach critical levels” by February. “At that point, frack crews will need to be idled or dropped as their simply won't be enough slack (DUCs) to operate at today's rapid pace, supporting our below-consensus oil growth forecast next year.”

The EIA in its monthly Drilling Productivity Report includes DUC estimates. In the latest report covering October, EIA estimated the DUCs in the seven largest onshore plays stood at 7,642, a decrease of 225 from September.

After building an inventory of nearly 3,000 DUCs since 2016, operators drew down inventory for five straight months through October, analysts noted. Even with the decline, monthly completions have remained robust, with 1,373 in October, 2% below the August peak but still above the level seen in any month last year, analysts said.

The months of DUC inventory to date this year have declined by an estimated 25%, nearing what could be considered "normal levels.” That means exploration and production (E&P) companies may not be able to maintain the current pace of DUC drawdowns next year.

Minus a big enough rebound in oil prices to push the rig count higher, monthly completions and oil growth “will have to stall significantly next year,” analysts said.

“Energy investors have been keen to point to the seemingly vast remaining inventory as a lurking bearish oil supply factor that will allow well completions to continue unheeded in the face of a more than 25% reduction in the U.S. onshore rig count (down 274 rigs year/year) and declining spending by E&Ps,” with capital expenditures in 2020 estimated to be down 10% across its coverage universe.

The argument initially makes some sense as DUCs require about one-third less capital spending to increase future U.S production growth, which means E&Ps could lower year/year costs by leveraging their DUCs.

“After peeling back a few layers, however, you will find that the perceived overhang of U.S. well inventory is actually much smaller than the EIA reported DUC inventory might suggest,” Freeman said.

A “proper” DUC count “should not include wells that will never get completed or ones that are uneconomic to complete.” The EIA has brought down historical DUC figures by around 7%, but “we believe a further downward revision is needed.”

The EIA's count contains a “sizable number of wells drilled more than five quarters ago, including ones whose story began back when oil was $100/bbl. We believe there is little chance that these older wells will ever be completed and, as such, should be reclassified as forever uncompleted wells.”

Forever uncompleted wells, said analysts, may exist for several reasons -- bankruptcy, drilling in an uneconomic area or because of operational/regulatory reasons.

“We should note that we are not blaming the EIA for bad data,” Freeman said. “We are simply making the case that the current reported EIA DUC count is overstated by nearly 15% versus reality. No matter how it is sliced, the difference in reported versus real DUCs is staggering.”

Should the DUC drawdown and completions continue at their trailing three-month rate, DUCs could reach critically low levels by February.

“Regardless of when the threshold is crossed, it almost certainly means a big slowdown in completions at that time, with rigs unlikely to be returning in force anytime soon at today's oil prices.”