Well Productivity - A Bullish Historical Perspective
Hey Gang, next week I will be away in Cancun, Mexico. Don’t be jealous, the kids (6 & 7 years old) will be with us, so it’s a trip not a vacation. Therefore, there will be no posts next week.
The Gist (1) The 2008-2017 productivity cycle is what sent industry returns in the tank. (2) There are signs that productivity growth has been stagnating coupled with the observation that development costs are rising at a faster pace. (3) Bullish long-term until another productivity cycle takes hold.
Productivity is deflationary.
The oil & gas industry is no different.
Over the past decade, the oil and gas sector has witnessed a surge in productivity fueled by the risk-taking E&Ps sector.
As shown below, production has marched higher.
At the same time, the number of producing wells as disclosed in company annual reports and 10ks has fallen dramatically.
Companies have had to drill less and less wells.
Indeed, the counterbalance has been the substantial increase in the length of laterals and the utilization of multi-well pads, reflected in the data on footage drilled per completed well and footage drilled per rig in operation. Both metrics, as well as a host of others, indicate significant productivity improvements.
The result:
Bullish - Global consumer.
Bearish - Drillers and the entire oil industry for that matter.
Productivity gains lower the barriers to entry, and attract more capital, which leads to lower profitability and returns.
My friends, there are a lot of reasons oils have underperformed the market since 2008.
But this boom in productivity has been at the heart of them all.
There are a lot of ways to measure well productivity, many do it with type curves, IP rates, well density, etc.
I attempt to do so with the following chart. Annual production per average producing well count as disclosed in the annuals and 10ks going back to 1939.
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