OCTG 2H19: Rolling with the Punches
Each year in June we take the temperature of the oil patch, speaking with people from every walk of the supply chain to get a sense of the market from their perspective. This exercise inevitably yields valuable and colorful commentary on the present state of affairs. Last year could have been summed up in “232” words as discussions were almost entirely variables on the theme of the investigation. In reviewing the results of this year’s midyear market calls, one phrase best captures the sentiment for OCTG in 2H19: “rolling with the punches.”
A sense of OCTG overcapacity is permeating the patch at this juncture, which is giving pause to many participants. We covered some of the more recent events leading to this view in our May Report. Coupled with the past week’s crude price inflection that sent the price/bbl into bear market territory, this scenario gives rise to increasing uncertainty moving into the back half of the year. No surprise when considering budgets were set at $50 - $55/bbl. It isn’t so much that demand is waning, it’s more that supply is omnipresent. As one party put it, “the operator story has remained mostly static since Capex budgets were announced earlier this year”; it’s the supply side that’s been caught flat-footed after assuming that the buoyant oil prices through most of 1H19 would prompt budget increases around this time. In past year’s operator commitments to discipline have been mostly met with a nod and a wink. Tighter grips on operator spends translate to an unlimited amount of supply chasing a limited amount of demand. Even with the possibility that the upcoming OPEC meeting will result in an extension of the production-cut agreement, it is unlikely such an event will budge the strict budgets of most operators or entice Wall Street to extend more credit.
Speaking of Wall Street, the word “credit” was used deliberately and repeatedly and in a way we haven’t heard since the late 2000s. Indeed, folks from the supply side corroborated a heightened awareness of the risks associated with overextending credit during such a state of flux. Another phrase that punctuated many conversations was, “dog eat dog.” Fierce competition for business has become ‘trolling’ for dollars, making it difficult for the market to predict a bottom. Most were in agreement that prices will tilt down for the remaining months of 2019 although a few remained optimistic thinking things might turn for the better in Q4. We discuss this in greater depth in our June Report.
Intel from investment banking firm Cowen says that E&Ps spent 28% of their ’19 budgets in Q1 and many others anticipate a similar situation to 2018 when “budget exhaustion” was the operative buzzword into the year-end. Remarkably, even with all the exhaust-talk late last year the rig count really didn’t suffer and it’s possible we won’t see a tremendous contraction at the end of this year although available funding will, in many cases, be funneled to completion efforts and remain steady for the “majors.” Private E&Ps remain the “wild card.”
American poet Robert Frost was quoted saying, “the best way out is always through.” While encouraging signs for the short term were scarce throughout our confab, the consensus seems to be on “consolidation” as the answer to many of the challenges the industry faces. Consolidation in supply and consolidation in operators—circumstances that appear to be taking shape around us—now offer possibilities for a brighter vision for the future as we approach ’20/20.’
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Photo Courtesy Surge Energy
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