We have a positive outlook for the coming year. Operators are moving forward with increased budgets and new drilling programs, rig count continues to increase, and fiscal discipline will lead to sustained growth. There will be challenges, but the industry is resilient and will tackle these challenges head-on.
Capital discipline will be the name of the game for public companies in 2022. Although oil prices are up, Wall Street is demanding decreased spending. Reinvesting cash flow and aggressive growth were the main trends over the past 20 years. In the post-pandemic and downturn-shy market, investors now want companies to use their cash flow to pay back debt and improve shareholder returns. For example, ConocoPhillips’ 2022 plan includes relatively flat production and higher capital returns to shareholders compared to 2021.
Most of the large companies are hedged at lower oil prices and cannot take advantage of increased commodity pricing. As a result, the major oil companies will likely keep production relatively flat compared to 2021. Like U.S. oil producers, OPEC+ members are being cautious. Skyrocketing gasoline prices and an oil shortage prompted the U.S. government to tap into the strategic petroleum reserves and call on OPEC+ to produce more oil at the end of 2021; however, the group refused to increase output.
Both of these trends are advantageous for private companies in the U.S. Start-up and private companies have more spending flexibility and opportunity for growth. They can take advantage of current high oil prices and build up a portfolio of proven assets to attract potential buyers and investors. Oil industry growth in 2022 will likely be driven by private companies, as public companies remain steady and stable.
The industry saw significant company consolidation and asset sales in 2021. Consolidation was a survival tactic following a slew of bankruptcies among both operators and service companies. Chesapeake, Concho, Primexx, High Point Resources, Seadrill and Basic Energy Services are among the companies who either filed for bankruptcy or were bought out. However, consolidation can still drive industry growth. Employees who are laid off after mergers or acquisitions often start their own private companies.
Asset sales and consolidation are also driven by financial discipline. As companies face pressure from investors to spend less and increase shareholder returns, many companies choose to focus only on their core assets, selling high-risk or low-profit assets.
ESG (environmental, social and governance) policies play a role in industry consolidation. Major public firms are under increasing pressure from shareholders to reduce emissions or even divest from oil and gas altogether. A recent example is Shell’s sale of its Delaware basin assets to ConocoPhillips. European-based Shell has stringent emissions reductions requirements, prompting them to sell some of their high-carbon assets to meet shareholder demands.
The ongoing global supply chain issues will continue to impact the industry in 2022. We expect delays and shortages for pipe, casing, chemicals and raw materials. This will be a challenge for suppliers and service companies who want to have materials on hand for customers, but do not want to be stuck with extra inventory in the event of another downturn.
Equipment shortages could be another challenge in 2022. During the recent downturns, many service companies took outdated drilling rigs, frac trucks or wireline trucks out of service and did not replace them. Now that oil prices have recovered, drilling activity is increasing. However, the amount of equipment remains static and it will be costly to return decommissioned equipment to service. Additionally, operators want state-of-the-art drilling rigs, which are in limited supply, according to Helmerich & Payne CEO John Lindsay. It is uncertain whether companies will manufacture or purchase new equipment, or if they will continue to limit their overhead.
The labor shortage will also impact oilfield operations and pricing. The widespread shortage of truck drivers has made oilfield transportation difficult and operators are experiencing delays in receiving materials. Truck availability is low, especially for companies without dedicated trucking company relationships.
Companies are struggling to find experienced field personnel, despite the increase in rig count and oil price. Many of the oilfield workers who were laid off in 2020 found jobs outside the industry, forcing companies to hire staff with less experience. There may be a slight increase in safety issues related to inexperienced operations crews.
Panther is no stranger to the oilfield’s ups and downs. We are looking forward to steady, sustained growth in the industry next year. Drilling activity and growth will largely be driven by private companies, while public companies focus on capital discipline and maximizing shareholder returns. Project management and relationships are our priority, and we are prepared to meet the challenges of the coming year.