After several quarters of talking about budget cuts and laying down drilling rigs, antsy oil and gas analysts are looking forward to some excitement. How quickly can companies ramp up in response to better commodity prices, they wonder.
The question, asked at numerous company earnings calls over the past several weeks, belies several assumptions: that prices are headed for a meaningful recovery and that the natural response to that recovery is to ramp up quickly.
It’s one of the most popular questions thrown at David Khani, CFO at Consol Energy Inc., and one he approaches with caution.
“That commodity curve could go crazy again if everybody starts drilling again,” Mr. Khani said. “You have to be careful about how fast you would ramp up.”
Cecil-based Consol, which laid down all of its rigs last year, looks at commodity prices over a three-year horizon, he said.
“You have to feel good about the sustainability of that curve,” Mr. Khani said, “or you have to be willing to hedge it.”
The drilling slowdown has given some companies a much-needed breather to focus their efforts on paying down debt and cleaning up their balance sheets, he said.
“If they turn on the spigot really quickly here, they can put themselves into another problem area.”
Until last month, the Marcellus and Utica shale region has been growing its gas production despite a 60 percent drop in the number of rigs over the past year.
That’s due in large part to the backlog of wells that had already been drilled but weren’t yet completed and put into production. That inventory peaked in October with 2,697 such wells, according to Platts’ Bentek Energy, a Colorado-based energy intelligence firm. By January, it had dropped to 2,084.
Bentek projects companies will run out of these drilled but uncompleted wells in about a year, which means keeping production flat would require putting rigs on the ground.
Some analysts are foreshadowing that will happen sooner rather than later.
Bill Way, president and CEO of Southwestern Energy, told analysts during the company’s first quarter earnings call that his company stands ready for a rapid response to better price signals.
Every time the gas price climbs by a quarter, it translates to a $185 million boost in cash flow, he said. That could warrant the return of one rig to the Marcellus, he said. With a 50-cent increase, the company might bring back two rigs, and so on.
“Owning our own rig fleet and completion equipment, and having terrific teams to manage them, will allow us the ability to bring wells to sales very quickly as market conditions warrant,” he assured.
What no one so far has spelled out is what those conditions would be.
When an analyst asked Chesapeake Energy CEO Doug Lawler how quickly the company can step on the pedal, he was assured that “inside of Chesapeake, there is a remarkable air force ready to take flight if we decide to ramp up our drilling.”
“That said, we just have to be very mindful of the balance sheet,” Mr. Lawler added.
Chesapeake can ramp up as fast as anyone in the industry, he said, but that may not be the best use of the company’s money. Paying down debt at a discount may be a smarter move, he said.
“So no commitment on how we will respond in 2017 at this point in time with higher prices, but definitely want to be as balanced as we possibly can be,” Mr. Lawler said.
EQT Corp.’s CEO David Porges said on his firm’s earnings call that unlike many of EQT’s competitors, the company hasn’t had large layoffs or deep cuts to its drilling and fracking equipment and service contracts, which means the company can ramp up faster than most, he said.
While it would typically take about nine months from the time it starts drilling a new well to the time the well starts to produce gas, EQT has modeled scenarios to cut that down to five or six months if a rapid response is warranted.
However, Mr. Porges said, the company needs to be “as disciplined in a more constructive economic environment, as we have been in the current less than constructive economic environment.”
The implication was that even if the industry rushes up the ramp, EQT’s decision will be mindful of the last time around — when a glut of gas drove gas prices into their stubborn current valley.