US oil drilling on decline in response to lower prices

In United States, oil drilling activity has begun to decline in response to the downturn in prices since the middle of 2022. This will lead to lower production growth throughout the rest of 2023 and into 2024.

The number of rigs drilling for oil fell to 600 in the week ending on February 24, down from a recent peak of 627 in the week ending on December 02, 2022 oilfield services company Baker Hughes found.

The rig count has declined in five of the eight most recent weeks and is at the lowest level since the start of July 2022.

The acceleration of drilling activity that started in August 2020 after the first wave of the pandemic appears to have paused or possibly ended.

Over the last three decades, changes in the rig count have generally followed changes in front-month WTI futures prices with an average lag of about 4-5 months (roughly 19 weeks).

When prices rise, delays reflect the time needed to confirm a change in price level is persistent rather than temporary, contract extra rigs, move them to the drill site, erect the equipment, and begin boring.

When prices fall, the lag reflects time needed to confirm the trend, finish part-drilled wells, drill wells already under contract, and idle unneeded rigs.

The number of rigs drilling for oil peaked in late November 2022, roughly 25 weeks after prices peaked, slightly longer than average.

Since June 2022, prices have generally retreated, which has been reflected in a gradual turnover in drilling activity rates.

Prices are roughly 15% below year-ago levels and still trending lower, implying drilling is likely to continue falling through end of June 2023.

Once drilling is finished, there is a further delay of six months on average for casing, pressure pumping, installation of surface equipment, flow testing, linking up to the pipeline network and entering commercial production.

The current slowdown in drilling is therefore likely to reduce production growth through the end of 2023 and probably into 2024.

The Energy Information Administration (EIA) forecasts US production will be only 340,000 barrels per day (2.7%) higher in December 2023 than it was in December 2022.

If this forecast is realized, growth will have halved from 660,000 barrels per day (5.8%) in December 2022 compared with December 2021.

Growth would be just one-sixth of what it was at the height of the second shale drilling boom in 2018, marking the end of the shale revolution.

Slower growth in US production will reduce any accumulation of crude inventories, even if the global economy slows this year, and restrict the potential for non-inflationary growth in the remainder of 2023 and 2024.

 

Engro Fertilizers outperforms peers

Quarterly results of fertilizer manufacturers were keenly awaited by the investors. My previous post hinted towards the possible decline in earnings of the companies due to: 1) reduction in international prices of urea and 2) slower offtake. Today, review of the accounts of three companies are presented. Only one company, Engro Fertilizer has posted above expectations results, while Fauji twins have posted below expected results. Results of Fatima and Dawood are still awaited.  

Engro Fertilizers (EFERT) has posted unconsolidated profit after tax of Rs2.86 billion (EPS: Rs2.15) for July-September 2016 period as compared to net profit of Rs2.79 billion (EPS: Rs2.10) for the corresponding period of last year, an increase of 3%YoY. The recovery in earning has come from, 1) strong growth in topline to Rs20.76 billion (including subsidy) caused by likely 39%YoY increase in Urea offtake to 502,000 tons post subsidy in budget FY17 and 2) 31%YoY decrease in finance cost on account of swift deleveraging and low interest rate environment. The result also accompanies an unexpected cash dividend of Rs2.50/share, taking 9MCY16 cumulative dividend payout to Rs4.50/share. On a cumulative basis, 9MCY16 earnings slipped to Rs5.66 billion (EPS: Rs4.25) compared to Rs9.91 billion (EPS: Rs7.44) for 9MCY15, down 43%YoY on account of unprecedented adverse market conditions caused by weak farm economics (urea offtake down 16%YoY in 8MCY16) and delayed implementation of subsidy on urea by the GoP.

Fauji Fertilizer Company (FFC) has posted unconsolidated profit after tax of Rs2.61 billion (EPS: Rs2.05) for July-September 2016 quarter as compared to a net profit of PkR3.69 billion (EPS: PkR2.90) for the corresponding period last year, a decrease of 29%YoY. The decline in earnings was expected on the back of: 1) gross margins declining to 32% (includes subsidy) on account of reduction in Urea prices (down 9%YoY) due to depressed farm economics and low international prices, down 36%YoY to an average US$184/ton during 3QCY16 and 2) a 83%YoY decline in other income (excluding subsidy) in the absence of dividend from associated companies (AKBL, FFBL and FCCL) and reduction in return on term deposits. However, the result was also accompanied by a cash dividend of R1.75/share, taking 9MCY16 cumulative dividend payout to Rs5.15/share. On a cumulative basis, 9MCY16 earnings declined to Rs7.51 billion (EPS: Rs5.90) as compared to Rs11.96 billion (EPS: Rs9.40) for 9MCY15, down 37%YoY on account of unprecedented adverse market conditions caused by weak farm economics, urea offtake down 16%YoY during 8MCY16 due to delayed implementation of subsidy on urea by the GoP.

Fauji Fertilizer Bin Qasim (FFBL) has posted unconsolidated net loss of Rs1.05 billion (LPS: Rs1.13) for 9MCY16 as against net profit of Rs939 million (EPS: Rs1.01) for 9MCY15. This significant downturn in earning resulted from, 1)gross margin declining to 14% (including subsidy) on account of significant reduction in DAP prices, down 15%YoY due to depressed international price trends. Price came down 24%YoY to an average US$325/ton during 9MCY16 and increased feed and fuel gas prices in 1QCY16  and 2) a 38%YoY lower other income (excluding subsidy of Rs3.18 billion on DAP and Urea in the absence of dividend from associated companies and reduction in term deposit placements. Following the trend 3QCY16 the Company posted net loss of Rs159 million (LPS: Rs0.17) for 3QCY16 as against net profit of Rs181 million (EPS: Rs0.19) for 3QCY15. However, on sequential basis, 3QCY16 earnings improved slightly against net loss of Rs381 million (LPS: Rs0.41) 2QCY16 on the back of likely increase in DAP/Urea offtake to post subsidy announcement in Federal Budget FY17.