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Crude prices remain closely tethered to the geopolitics of OPEC+ and the US trade Twitter-verse, and for that we lean on higher-level insights from our colleagues on the WR Macro and WR Integrated Oil/Refining. Nevertheless, the key supply-side catalyst for OFS (beyond anticipated evidence of legacy int’l/offshore declines) is a rollover in US shale efficiency and return of the inflationary NAM barrel. This US Oil Productivity Drilldown addresses what we believe will be challenged US oil growth in ’19, particularly vs. the EIA/IEA/OPEC consensus of +1.3 mmbpd black oil. With early indication that E&Ps will continue to live within cash flow amidst recent oil volatility, we leverage our WR Production model to test US growth sensitivity to key inputs: 1) production per completion, 2) decline rate, 3) YoY frac growth. 

We are marketing in Dallas and Houston this week, which from a YE-timing perspective would be otherwise imprudent given that a beleaguered energy market is already looking beyond Jan-1. Nevertheless, we are thankful for the thoughtful engagement so late in the year. Moreover, we are getting better visibility into several key catalysts that could drive incremental positivity back into the space. First, US shale capital efficiency must rollover in ’19 for both the oil macro and for OFS earnings power (in the current commodity paradigm in which E&Ps appear to be sticking to CFO-driven capex, we would need to see underwhelming shale growth below the 1.8-2.0mmbpd “consensus” figure). Second, beyond internalizing shareholders over growth by way of dividend and buyback, investors need to see more consolidation within SMID-NAM services. Pumpers lend themselves well to this theme, with the group trading marginally above replacement value.

This week, we are on the West Coast marketing with WR Integrated Oil/Refining/LNG Analyst Sam Margolin. The trip is timely given two highly-anticipated catalysts for the oil price, and based on our marketing conversations around what has become both a fragile and volatile commodity environment, the next two weeks will be crucial for OFS. Friday (11/30/18) kicks off the G20 Summit in Buenos Aires, where investors hope to see some resolution for, or at least clarity on the magnitude of, the US-China trade war (as it relates to the demand side of the global oil balance). In terms of the Oct 6th OPEC meeting, most investors remain confident in the re-establishment of near '16-level production cuts, while a select few see more of a 50-50 possibility. One could argue that a relative lack of spare capacity should invite cuts (even if recent, bearish US production data is inaccurate), but a precarious US-KSA geopolitical paradigm and peripheral Iran/China implications make for a number of possible outcomes next week. We will circle back on the fundamental OFS takeaways following this week's marketing ventures, but clearly N-T group performance will be driven by the outcome for oil.

We are rolling out the inaugural edition of the weekly Roughneck Rumblings in an understandably trying time for our clients. Our goal is to stay ahead of the OFS conversation (however muted it may currently be) and try to improve the research process in any way that we can. Each week, you can expect 1) incremental thoughts on the group, 2) a chart of the week (and/or roughneck rumblings – feedback from the field), 3) links to pertinent WR Energy publications, multimedia, and news, 4) various WR/consensus, valuation, and performance charts (with unlimited transparency into how our calls are working), and 5) a slew of up-to-date industry data (including RigData analysis of rig types, contractors, and customers by US basin). We welcome all feedback and ideas for bespoke items to include on a more regular basis.