Historic low rig count in Colorado

As OK Energy Today reported this week, the nation’s oil and gas rig counts continue dropping and that only six drilling rigs remained active in Colorado.

The Colorado Sun reported it is an historic low for the state where the average for the month of May was only seven drilling platforms, the fewest in 28 years according to records maintained by oil field services company Baker Hughes.

Some Oklahoma drilling firms were among those active in the D-J Basin in Colorado including SandRidge Energy whose website indicated that as of May of this year, the company continued targeting the North Park Basin in Jackson County, Colorado. SandRidge stated that it continued targeting multiple Niobrara benches on its 93,000 net acre position where oil content exceeds 80% of total cumulative production.

It is unclear if SandRidge Energy, in light of its financial problems and continued layoffs, is among the remaining six rigs still actively exploring new oil sources in Colorado.

 

In the Denver-Julesburg/Niobrara Basin, which extends along the Front Range into southern Wyoming, seven rigs were operating mid-May the lowest level in Baker Hughes’ basin database since it began in February 2011.

The combination of plunging oil prices – set-off in part by a brief price war between Saudi Arabia and Russia – and a collapse in demand due to the novel coronavirus pandemic shutting down economies has roiled the industry worldwide and led to an oil glut.

In addition, in Colorado the industry is facing a sweeping revision of oil and gas and air emission regulations, required by laws passed in 2019.

“Those three things have been devastating for the state,” said Lynn Granger, executive director of the Colorado Petroleum Council, a trade group. “It happened so quickly it took the market some time to react.”

Additional pressure has been put on many operators who ran up heavy debts and even before the crash were struggling to post positive cash flow – a situation worrying to investors.

The combination of horizontal drilling – with lateral wells as much as 3-miles long – and hydrofracturing, or fracking, freed oil and gas from tight shale deposits and set-off the shale boom and a frenzy in both investing and drilling. In 2019, the U.S. was the world’s largest oil producing country, with an output of 12 million barrels per day.

“You had some companies that had several years of poor capital allocation and diminishing liquidity and lack of access to capital markets, before this hit,” said Tyler Hoge, a financial analyst with Enverus, an industry analytics firm.

Colorado is not alone. The Baker Hughes rig count for the U.S. plunged to 339 in May, also a historic low, having dropped from 779 rigs on March 15. In Texas’ Permian Basin, the country’s largest oil producing region, 243 rigs have been shut since March – 57% of all the rigs in the 86,000 square-mile basin.

As recently as March 20, there were 21 rigs operating in Colorado, according to Baker Hughes. In May of 2019, there were 33.

The oil and gas industry is used to boom and bust cycles – adding rigs when oil prices are high and shutting them down when they are low. The lowest monthly average for Colorado rigs before this month was 11 in September 1995.

Colorado hit a low of 16 rigs when the price for West Texas Intermediate (WTI) crude oil, the U.S. benchmark, dropped to $29.13 a barrel in January 2016, down from $107 a barrel in June 2014.

The NYMEX spot price for a barrel of WTI crude was $31.91 on May 29, a roughly 40% drop in 14 weeks – prices had plummeted to as low as $11.26 a barrel in April.

There is, however, a big difference between the last downturn and this one, industry analysts say. First, the 2014-16 price decline was gradual – spread over about 18 months, and, second, these exploration and production companies (E&Ps) were financially healthier.

In 2016, “E&Ps had the ability to raise capital or take on debt. That ability is gone now,” said Matt Hagerty, an analyst with BTU Analytics. “The situation was bad before everything that has happened this year.”

Absent an infusion of cash and faced with debt, drillers are cutting operations and expenditures, shutting in wells and trying to avoid running in the red, while posting positive cash flow through existing wells. This is what is leading to the low level for activity in the state.

“Cash flow is number one,” Hoge said. “Operators want to come out of this, despite everything that happened in 2020, saying we came out with cash flow positive.”

The major companies operating in the state did not respond to a Colorado Sun request for comment, but the publicly traded ones made their plans clear in May earnings calls.

Houston-based Occidental Petroleum Co. was the largest oil producer in the state in 2019, according to Colorado Oil and Gas Conservation Commission data, primarily as a result of its $55 billion acquisition, including debt, of the Anadarko Petroleum Corp.

Source: The Colorado Sun

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