The nearly 55% drop in US Lower 48 rig counts during the first half of 2015 is forecast to contribute to a second-half 2015 production decline of roughly 7% in tight oil and shale gas regions at June operating and activity levels, according to Fitch Ratings. This exit production rate would be around 3% lower than year-end 2014 levels. Further, Fitch anticipates that some of the productivity gains realized during the first half of 2015 will lead to a lower, longer-term US Lower 48 rig run-rate of 1,200–1,300.
Extrapolating from US Energy Information Administration (EIA) data, Fitch forecasts that, at June operating and activity levels, oil production, including crude and condensate, declines from tight oil and shale gas regions will outpace the fall in gas production. Fitch calculates that the 2015 exit oil production rate from tight oil and shale gas regions will be about 9% below the 5.5 million barrels of oil equivalent per day (MMboe/d) June 2015 rate. The projected exit oil production rate would be nearly 6% lower than year-end 2014 levels.
The EIA's estimated new well production per rig and legacy well decline rates are key inputs for Fitch's second-half 2015 production forecasts in tight oil and shale gas regions. To account for movement in these operating metrics, Fitch conducted several sensitivity analyses. For example, a 15% improvement in new well production efficiency per rig, assuming rig counts and legacy well decline rates remain constant at June 2015 levels, second-half 2015 total production in tight oil and shale gas regions would decline by 3%. This would result in the total production exit rates being modestly higher year over year.
Fitch's longer-term US Lower 48 run-rate estimate is 1,200–1,300 rigs. This is 30%–35% below the recent peak US onshore Lower 48 rig count of 1,868 in mid-November 2014. Fitch believes that a key implication of this "new normal" run-rate for onshore drillers, such as Nabors Industries Ltd. (BBB/Stable), is likely to be the heightened importance of maintaining a US rig fleet weighted toward the most-efficient, highest-quality rigs. Fitch anticipates that these types of rigs are best positioned to work during and after the cycle.
Pricing support for a larger scale ramp-up in activity may be several years into the future. Fitch still views a longer, slower rig recovery profile as likely, based on Fitch's West Texas Intermediate (WTI) price assumption of $60 per barrel for 2016 and $70 per barrel long term. Historical down cycles suggest that trough-to-previous-peak-rig response (though tight oil and shale gas has likely created a new normal run rate) depends on the speed and intensity of the price recovery. Fitch notes that the 2001 U-shaped bear market recovery required about 35 months to return to peak levels, while the 2009 V-shaped bear market needed roughly 28 months.