A reversal in the backlog of uncompleted U.S. onshore wells could swamp operators when activity resumes early next year as there no longer will be an incentive to defer wells in the largest U.S. play, according to Raymond James & Associates Inc.

In a note issued Monday, analysts Praveen Narra and J. Marshall Adkins said the oilfield services (OFS) sector should begin to recover as drilled but uncompleted (DUC) wells are finished in the Permian Basin.

“Given the lack of current incentive to defer wells, we believe the turn in U.S. activity will likely be much faster than the current consensus expectations,” they wrote in the firm’s Energy Stat. “That means 2019 oilfield prices should move higher sooner than most are expecting. As such, we believe that the near-term concerns facing the North American pressure pumping market are overdone.”

Third quarter earnings results for the OFS sector kick off Friday, with No. 1 global provider Schlumberger Ltd. the first out of the gate, followed on Monday (Oct. 22) by North America’s No. 1 fracture (frack) specialist Halliburton Co.

Most publicly held exploration and production (E&P) companies have said they are not intentionally deferring completions. “However, it is clear that rig activity has held steady while completions activity has been modestly declining in the Permian,” Narra and Adkins said. “When this happens, the backlog of DUCs increases.”

Nowhere is the DUC backlog more apparent than in the Permian, where the inventory has risen this year to 8.5 months from seven months, according to Raymond James. The Energy Information Administration in its latest Drilling Productivity Report issued Monday said Permian DUCs climbed 194 month/month in September to 3,528.

Two things have contributed to the larger backlog: larger well pads and lower prices for Permian oil, analysts said. Permian well pad sizes have increased to holding dozens of wells per pad, which means more time to drill and frack wells. The inventory naturally has increased.

Tight oil pipeline takeaway capacity in the Permian has also crimped prices below Brent and West Texas Intermediate, leading some E&Ps to defer completions and potentially maximize returns.

“This would be particularly true amongst those that were not fully hedged as additional returns could be generated simply by waiting to complete the well,” according to the Raymond James team.

As an example, analysts used information available on July 6 to estimate how much an operator could earn on a net present value (NPV) basis by simply deferring a well. Using the futures curve at that point in time, they estimated that the NPV of a single well that began production in August would generate an NPV of $4.6 million.

“However, by waiting 12 months, using the same futures curve pricing, that same well would generate $4.9 million. Hence by simply waiting 12 months, the company could simply defer the well and generate an additional $300,000 per well.”

Over the past several quarters, some Permian completions were building DUCs based on the futures strip. This is no longer the case, according to Narra and Adkins.

“Right now the futures curve is indicating that oil prices will be just $2/bbl higher than they are today in 12 months — they do fall a bit into year-end but not significantly. Clearly, the level of short-term contango has diminished significantly over the past few months. An E&P’s decision to complete a well today looks much different than it did just three months prior.”

Using the same sample well type curve and oil price data as of Oct. 3, the E&P’s well today would generate an NPV of $6.15 million per well. If the operator were to delay the completion another 12 months, “this would actually result in a slightly lower NPV,” according to Raymond James.