A so-far lousy year for the stock market has been a godsend for oil stocks. Spiking natural gas and oil prices have replenished energy industry balance sheets thinned by the pandemic demand crash. And a steady increase in the number of drill rigs heading to the fields has raised some hope that a bonanza of fresh oil supply could be on the horizon.
That optimism had appeared to receive some support Thursday, as the Organization of Petroleum Exporting Countries boosted its monthly production increase budget by more than 50%, the first such acceleration since August. But a fresh round of rig data on Friday showed that a 10-week advance in drilling activity flattened. At the same time, U.S. oil prices jumped nearly 3%, back above $120 a barrel.
Oil stocks, which have led the stock market's upside by long strides this year, reacted positively on Friday. At the head of that group, oil and gas drillers posed the top gain through May — up more than 96% — among the 197 industry groups tracked by IBD.
With the group, land rig leaders Patterson Energy, Helmerich & Payne and Nabors Industries have all more than doubled in price since the start of the year.
But despite strong capital expenditure increases announced in the first-quarter reporting season, oil and gas companies are unlikely to scale up production operations anytime soon, those close to the industry say. And even as fuel prices remain painfully high for consumers, a closely watched gauge of rig activity due out on Friday will show whether the recent growth in rig activity may already have begun to level off.
Oil Prices, Russia, OPEC
The price of crude oil has been on an upward trajectory since the beginning of last year. Prices angled sharply higher following Russia's invasion of Ukraine in February, and as global backlash against the invasion shunned purchases of Russian oil. Spot prices for U.S. oil briefly touched $130 in March.
OPEC — concerned about high prices leading to demand destruction — announced its production quota increase Thursday in an effort to balance those Russian barrels lost to the market. (And possibly to appease requests from the Biden administration and other governments to help ease oil prices.)
And while high prices in the past have triggered a headlong oil industry sprint to increase production, U.S. producers have held off this time. Issues with labor and material shortages have constrained efforts and driven up costs. Instead of chasing such oilfield inflation, following a harsh few years of oil-patch bankruptcies, company boards are voting instead to appease investors with share buybacks and dividend increases.
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First-quarter reporting showed capital spending budgets for oil and gas producers up by an average of 23% this year compared to 2021. That included a 57% increase from Exxon Mobil, to $4.9 billion for the year. Dow Jones energy giant Chevron stuck to its previously announced 12% increase for the year, to $2.8 billion. The bulk of that spending, some analysts estimate around two-thirds, is covering inflation costs at current oilfields and only 8% is going toward new production growth.
A quarter of large oil and gas firms responding to a March survey conducted by the Federal Reserve Bank of Dallas said they expected their production levels to remain the same from fourth quarter 2021 to fourth quarter 2022. Fifty-nine percent of executives also said that "investor pressure to maintain capital discipline" is the primary reason publicly traded oil producers are restraining growth despite high oil prices.
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"We're seeing production growing by about 100,000 barrels per day each month," said Matt Smith, lead oil analyst for the Americas at Kpler. "But you're not really seeing a response, per se, to higher prices."
"A key driver is just the lack of appetite from publicly traded oil companies to ramp up production," he added. "They're essentially beholden to shareholders who prefer to see cash flow returned to them, rather than being invested in production."
U.S. Crude Production
U.S. crude oil production is estimated to average 11.9 million barrels per day for all of 2022, an average increase of 700,000 barrels a day compared to 2021, according to the U.S. Energy Information Administration.
Government forecasts also suggest crude production will increase again in 2023 to more than 12.8 million barrels per day. If this prediction holds, it would surpass the annual average record of 12.3 million barrels per day set in 2019.
Shale giant Pioneer Natural Resource CEO Scott Sheffield disagreed with those forecasts. He warned investors in May that they should expect much less production.
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"The growth profile that EIA has, and some of the other think-tank firms, I think it's too aggressive over the next two years for U.S. oil production," Sheffield said during the first-quarter earnings call.
Sheffield estimated this year's overall U.S. oil output will rise in a range of 500,000 barrels a day to 600,000 barrels per day. PXD — one of the top five U.S. oil producers and the leading oil producer for 2021 in the Permian basin production area, according to the Railroad Commission of Texas — also anticipates its own oil output to increase by no more than 5% this year.
Despite the recent rise in drilling rigs and production, U.S. crude production remains significantly below 2019 levels seen in 2019. In March, U.S. field production was nearly 11.7 million barrels per day. This was an increase of 3% compared to the month prior, but a 9% decrease from 12.8 million barrels in March, 2020.
Months before the beginning of the pandemic in November 2019, U.S. monthly crude production reached a record high of nearly 13 million barrels per day.
Oil Rigs By the Numbers
This week there were 727 active U.S. oil rigs, a 60% increase from last year. The number did not change from the week prior, when the number went down by one rig. That slight drop broke a 10-week streak of rising rig numbers. Baker Hughes releases weekly census on Friday. This two week plateau could could hint at a leveling of industry activity.
In 2020, in the midst of the pandemic, active onshore oil rigs dropped below 300. Since its low point in August, 2020 of 244, the number of drilling rigs has steadily increased. In the first week of January 2022, there were 588 active rigs.
The number of rigs is still well below pre-pandemic levels. The number of active rigs held well above 1,000 from Aril 2018 to April 2019.
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Onshore oil and gas drilling will be key to driving a production revival, according to Smith, of Kpler.
Helmerich & Payne, Patterson-Uti Energy and Nabors Industries are the top primary land rig providers in the oil & gas drilling group.
The group itself sits at No. 1 out of IBD's 197 industry groups.
Helmerich & Payne stock jumped 2.87% Friday, trading near a three-year high in May following a breakout in March and a weak-volume rebound from 10-week support in May. It has a 93 Composite Rating and a Relative Strength Rating of 98, according to IBD Stock Checkup.
HP reported that it ended the second-quarter with 171 active rigs and that it foresees moderate growth in the upcoming quarters as there is "more rig churn developing in the market."
Shares of Nabors gained 2.88%. The stock is poised in a seven-week cup base with a buy point at 207.77. Its Composite Rating is an 89, with a Relative Strength Rating of 98.
Production Buzzing In The Permian
The bulk of the current U.S. crude oil production comes from the Permian Basin of West Texas and New Mexico. The field is delivering more than 5 million barrels per day, a high water mark for the region. Most of the production increases thus far have come from smaller, non-publicly traded companies.
However, Diamondback Energy has reportedly turned aggressive operating 12 rigs in the resource-rich region. Still, well completion services, materials and labor are increasingly expensive and difficult to procure, and much of the drilling goes simply to holding output levels steady.
"Everything is tight across the board, whether it's sand, casing, new high-spec rigs, frack crews; everything is very, very tight," CFO Kaes Van't Hof said during the company's Q1 earnings call in May. "We're doing our part by keeping our activity levels flat."
But soaring oil prices make holding production steady a winning strategy. Analysts project second-quarter earnings for Diamondback of $6.36 per share. That would be up 165% from a year earlier. Sales projections call for a 64% gain to $2.39 billion. Analysts predict Diamondback earnings for all of 2022 will rise 116% to $24.32 a share on a 36% sales increase to $9.27 billion.
FANG stock ranks No. 17 among oil stocks in the U.S. exploration and production group. Its profit growth has earned it an Earnings Per Share Rating of 94. Its recent stock price action has resulted in a Relative Strength Rating of 97. Those and other strong IBD fundamental and technical ratings combined have landed a perfect 99 for its Composite Rating.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
