Expert Q&A: RigUp sits down with WoodMac’s R.T. Dukes

Where do we go from here?

As we progress through a volatile 2Q, we’re sitting down with one of the most well regarded E&P analysts on Wall Street to discuss the state of the North American upstream industry.

RT Dukes Image

RigUp: M&A in the Permian Basin remains a hot topic. This quarter we’re starting to see majors or larger E&Ps like Exxon and Marathon making sizable acquisitions in West Texas. Is this a signal that the consolidation is coming to an end? What do you expect in terms of M&A in 2Q 2017, particularly as it relates to the Permian Basin?

R.T. Dukes: There will be more, but there aren’t a host of companies looking to exit like there were 18 months ago. We’ll continue to see deals, but the next wave of consolidation will happen over a longer period and will be when economies of scale begin to matter. Add up guidance from many of the top operators, and it might be sooner than we think.

RigUp: Wall Street has dramatically increased Capex estimates for the back half of 2017 and into 2018. Based on your basin by basin analysis, is North America going to exceed production expectations for the year and if so, is that bearish for the commodity markets?

R.T. Dukes: That’s dependent on your expectations! With that, we’re on track to surpass the 2015 peak in oil production near the end of 2018. I suspect that probably outpaces what most people thought would happen. Of course, that could all change to be lower or higher if prices decide to settle closer to $40 or $60.

RigUp: Are we in a world now that should be focused on the “Call on Permian” instead of the “Call on OPEC”? Or is that still wishful thinking and posturing?

R.T. Dukes: The Permian is a significant player on the global stage, but it’s not big enough to single handedly suppress prices for a long time. It will create problems in years that demand growth slips or when global supply outperforms. That will cause year to year problems, but in the long-term, it’s not the sole price setter.

RigUp: Given the strength in production growth in West Texas, there’s some scuttlebutt that we’ll run into takeaway capacity issues starting later this year. What are your thoughts?

R.T. Dukes: We definitely could, but the pipes are on the way. We don’t expect any prolonged blowout in prices due to takeaway capacity. The problems are intra-regional and on the other side of those long haul pipes. Many of the major producers plan to produce so much they need to think about who their buyers are and securing demand for their production.

RigUp: Shifting conversation about takeaway capacity to the Northeast, what are your thoughts on basis differentials in the Northeast? How big of an impact is Rover Phase 1 going to have on the market? Do E&Ps adopt an even more aggressive productive behavior thereafter?

R.T. Dukes: It’s not just Rover, but the other pipes that will add Northeast connectivity too. Add all the projects together and the region looks set to have excess capacity for a few years post 2018. As a result, producers are going to realize prices that are much better than what they’ve seen in recent history.

RigUp: For the last 6 months, the industry has been talking about “core natural gas wells” having been drilled and completed already. What’s your opinion there?

R.T. Dukes: We’ve seen high grading to the highest degree over the past couple of years with oil and gas prices seeing cyclical lows. That is changing on the oil side as operators are already stepping out, but there’s still a big inventory of core natural gas wells that have yet to be drilled. Above $3 natural gas, we’ll see more drilling outside of just the Marcellus and Haynesville.

RigUp: RigUp’s marketplace has seen the market visibly tighten for frac for 1Q this year. In some cases, based on geographical and technical requirements, there’s no spot availability until June 2017. What’s your perspective on the medium-term and long-term supply / demand for frac horsepower in North America?

R.T. Dukes: Costs are going up! The jobs are bigger, and we’re going to need more HHP than we had in 2014. Barring a price shock to the downside, we’ve probably seen the lows in completion costs and the name of the game is back to managing those costs. The industry seems to underestimate how big those swings can be, and we’ll need new horsepower sooner than most believe.

RigUp: Could you go into further detail concerning completion design strategies that E&P companies are deploying currently?

R.T. Dukes: Bigger has been better, but we’re starting to see that normalize. We’ve seen diminishing returns in certain areas as operators use more than 1,500-2,000 pounds of proppant per foot. While proppant and completion prices were low, operators had the luxury of pushing the limits. Now that costs are going up, we expect we’ll hear talk of more efficient completions utilizing the right amount of proppant, water, horsepower, etc.

RigUp: Specific to oil and gas technology, what’s the current state of the industry and their willingness to modernize? At RigUp, we’ve been blessed with a strong contingent of supportive and transformational companies that have championed our adoption. But at the same token, we’ve been told by certain operators that the internet just won’t work in oil and gas. What’s your take? Will the technology adopters win?

R.T. Dukes: I’ve seen it my entire career covering oil and gas: “If it ain’t broke, don’t fix it.” We’ll always have companies like that as long as they can capture reasonable margins, but we’re not in a world where anyone expects $5 natural gas or $100 oil. The potential margin just isn’t as big as it was. A lot of people believe we’ve already cracked the code, and everything here will be small gains. The problem with not worrying about small gains today is they add up to big savings over time. Technology is as important as ever, and I suspect those companies that are avoiding tech are much more likely to be the next casualties of the shale revolution.

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