OCTG Downturn Goes Into Overtime. Will 2H16 Be A Game Changer?
If you’re reading this today — congratulations, you’re still in the game! You’ve made it to the halfway point of a grueling year. June is the month we confer with a number of OCTG players from all walks of the supply chain to get their thoughts on the outlook for OCTG in the second half of the year. Suffice to say we always net some interesting color commentary. While conversations ranged from well-worn speculation about oil prices to continued irritation over tubular imports, the one issue that spoke to all parties was the nagging high level of prime OCTG inventory and that’s what we’ll be concentrating on in our editorial this month. You may recall in the course of our 1Q16 OCTG inventory survey we noted a troubling decline in the pace of destocking and the corresponding high months of supply. Stubborn inventory levels and elevated months of supply are never good for the tubular sector but we knew there was more to these metrics than meets the eye. Stats are often distorted in protracted downturns and this downcycle is unprecedented. Thus, we’ve been working to dissect and decipher the current OCTG inventory and determine the percentage that is slow or non-moving, which we detail in our June market intel. In general, the items that have been mostly benched are paired up with a corresponding segment of the market. Adding to the conundrum of high inventory volumes is the fact that new pipe typically sells before old plus the cost of the old inventory is greater than the current replacement cost. Then there’s the associated burden of maintenance expenses to safeguard older inventory, a good portion of which has been sitting on the ground deteriorating with the potential to be downgraded for other uses. Many of these items are a year old or more. It’s a recipe for disarray and that’s what the OCTG market is feeling. The “fix” for this bloated situation will ultimately come in various forms: scrapping and repurposing among them. Thinking about the rig count for a moment: 1Q16 averaged 562 rigs, 4Q14 averaged 1,912 – that’s down 71%. Now consider where we were in terms of inventory at the end of March 2015 when we recorded the highest levels since the early 80s. We’ve worked through almost 1MM tons of OCTG inventory since then. No easy feat given the grim market. While we discussed all manner of things OCTG with our pros, inventory was by far the most pressing of the topics. However we do want to report that some cautious optimism was expressed for 2H16 into 2017. And caution is key here folks as increased capacity by way of new mills remains a significant threat to recovery. Meanwhile, Evercore released their 2016 Global E&P Mid-Year Spending Outlook that presents a bullish North American land sentiment leading to a healthy rebound in 2017. According to their report, “NAM capex will be up 25% next year, which should drive a similar increase in the rig count.” They do submit that a higher percentage of the spend will be allocated for completions. We concur that new capital for 2H16 and 2017 will be directed predominantly to completing DUCs, workovers and refracs in an effort to bolster revenue streams. The name of the game in this market is trying to find an upside for the downturn. In other words, consider this a drill for the next boom. Game on!
Photo Courtesy US Steel Tubular Products