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Low prices threaten to curb rising rig count

Permian Basin producers added another three rigs in the week ending Friday, according to the widely-watched Baker Hughes rig count.

But observers met the ongoing uptick in drilling activity with concern that it might be short-lived, after another dip in oil prices in July threatened to erase the gains of the previous months.

The latest build in Permian rigs left 245 drilling in the region. That represented an addition of 13 drilling in the region during the past three weeks. Nationally, oil and gas producers added 21 oil rigs in the past week, offset somewhat by a decline of two rigs drilling for gas.

But West Texas Intermediate oil prices continue to hover at about $50 per barrel — about half the peak price of this time last year. And the regional benchmark Plains-West Texas Intermediate posting ended at $44.50 per barrel on Friday.

Rigs are generally contracted weeks or months ahead of time, and those added this month were likely based on oil company executives’ confidence in oil prices in the $60-per-barrel range, said Kirk Edwards, president of Latigo Petroleum in Odessa.

That is where Edwards said he was coming from when he contracted for a rig in the Panhandle earlier this month that is set to drill in the next few weeks. A well can take about 30 days to drill.

“I’m hoping in the next two to three months, once that well gets online and producing, prices will have recovered to the $60 to $70 range,” Edwards said. “That’s what we are betting on, and if it hasn’t, we’ll stop our drilling again just like everybody else.”

In the meantime, the rig count might continue to rise in the next week or two, Edwards said, but it should drop again after.

“If this price stays in the sub-50 range where it is, we will see an even bigger drop off than what we have before,” Edwards said.

His bearish assessment is in-line with recent reports from the executives of major oilfield service companies that, at their most optimistic, predicted a tepid recovery in drilling activity this year. On Thursday, Weatherford International announced plans to lay off 1,000 employees in addition to the 10,000 the company shed earlier this year.

In related news, Low oil prices remain a factor in San Juan Basin.

Interviews with local service company executives suggested a similarly negative outlook.

“It’s going to be a very very rough third and fourth quarter, through the end of the year,” said Dale Redman, CEO of ProPetro, a private oilfield service company in Midland. “There is not any good news on the oil price front. There is just so much negativity in the market place — on just about every front. And I am an eternal optimist.”

Redman said he expected oil companies that do not have to drill to scale back on developments and capital expenditures in the Permian Basin. Service companies, meanwhile, must deal with diminished margins, while seeking to keep crews and equipment working, in an effort to survive.

In the lower oil price environment, services companies in the region face pressure to cut what they charge oil companies, with discounts in a range of 25 to 50 percent. Coupled with oil prices improving from spring lows to the $60-range, producers saw opportunity to drill again.

One of the major operators in the region, Pioneer Natural Resources, discussed plans in June to begin adding two rigs a month and building back the operating fleet to about 36 rigs in 2016, reaching roughly the same level of activity as before the oil price collapse.

“Management teams sort of had a false start on the recovery in terms of the signals they’ve been getting,” said Joseph Triepke, a financial analyst from Odessa and managing director of Oilpro.com. “It was green a month and a half ago. And now, it’s red again.”

(c)2015 the Odessa American (Odessa, Texas)

This article was written by Corey Paul from Odessa American, Texas and was legally licensed through the NewsCred publisher network.

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