Oil & Gas

Jason Jones analyzes the U.S. oil and gas industry’s market trends and pricing and provides advice for lenders based on the short- and long-term outlook.

Current Trends

• Crude oil prices increased 43% by mid-July 2022 compared with the same period last year.
• North American rig counts increased 49% year over year by mid-July 2022, which is a significant improvement from 2020’s historic lows.
• Values have stabilized, and in some instances increased, for oil and gas exploration-related equipment.

Market Outlook

The oil and gas industry faces heightened uncertainty because of price increases and sanctions related to the Russia-Ukraine war, production target adjustments by the Organization of the Petroleum Exporting Countries (OPEC) and 10 non-OPEC countries, known as OPEC+, and U.S. oil and natural gas drilling rates, among other factors.

Rising Oil Prices Continue

Oil prices increased steadily throughout 2021 and began to surge in the first quarter of 2022. After hitting a 10-year peak of $123.64 per barrel in early March 2022,[1] the West Texas Intermediate per-barrel price remained 43% higher by mid-July than the same period in 2021.[2] Per-barrel prices averaged approximately $109 from April through mid-July,[3] which are levels not seen since summer 2014.

Current prices have significantly improved from the historic lows of 2020, and the national average hit a critical inflection point early in the peak summer travel season. However, gas prices fell 10% by mid-July from a record high of over $5 a gallon in early June. Strong consumer demand amid ongoing global pandemic recovery, the Russia-Ukraine war and resulting oil supply uncertainty drove the increase.

Crude Oil Price Trends

The U.S. government called for increased crude oil production beginning in early 2022 to alleviate higher oil and gas prices. OPEC+ announced an upward adjustment of production targets for July and August at its June meeting.[4] The U.S. Energy Information Administration expects OPEC crude oil production to average 29.2 million barrels per day for the second half of 2022, up 0.8 million barrels per day from the first half of the year.[5]

Additionally, lasting effects of the pandemic are contributing to growing uncertainty in the industry. Despite ongoing recovery efforts, some countries have enacted new lockdowns in response to COVID-19 variants, exacerbating existing supply chain and product manufacturing issues and dampening petroleum-based fuel demand. However, daily commuting and business and vacation travel have generally returned to or exceeded pre-pandemic rates, increasing fuel consumption.

As these levels stabilize or continue to improve, Gordon Brothers expects secondary market demand for downhole tools, exploration and production equipment, and inventory to experience sustained value recovery that could meet or surpass pre-pandemic levels.

Active Rig Count Increasing

North American rig activity steadily increased through 2021 and the first half of 2022 as demand rebounded from the pandemic, and global business and recreational activity levels normalized. By mid-July, North American oil and gas drilling rig counts increased year over year by 313.[6] Active rig counts changes lag behind crude oil pricing, and it remains to be seen whether increased rig counts will temper rising high prices.

Despite changes in the oil and gas industry, particularly since the shale oil and natural gas industries ramped up production in recent years, active rig counts can still signal oil and gas companies’ willingness to continue investing. Additionally, rig counts can anticipate demand for oil services industry products like drilling, producing and processing hydrocarbons.

Valuation Considerations

In June,[7] OPEC members and producers agreed to advance the planned overall production adjustment for September and evenly redistribute the 0.43 thousand barrels-per-day production increase in July and August.[8]

North America will likely see incremental production and exploration increases, though 2022 capital expenditures were budgeted prior to the sharp rise in oil prices. While prices have reached levels not seen in nearly a decade, lenders remain hesitant to finance oil and gas equipment directly related to exploration. Without sustained, relatively stable oil pricing, the availability of capital to take on projects is expected to remain somewhat limited.

The oil and gas market continues to face significant uncertainty surrounding the Russia-Ukraine war. Sanctions levied against Russia have disrupted the country’s oil production and exports. Russia is the world’s third-largest oil producer behind the U.S. and Saudi Arabia, so a potential loss of Russian oil exports from global markets cannot be overstated. Prior to Russia’s invasion of Ukraine in January 2022, its total oil production was 11.3 thousand barrels per day.[9]

In addition to unprecedented sanctions on Russia following its invasion of Ukraine, major oil companies, trading houses, shipping firms and banks have backed away from doing business with the country. In early June 2022, the European Union adopted a sixth package of sanctions covering 90% of its current oil imports from Russia and banning seaborne imports of Russian crude oil by December 2022 and petroleum product imports by February 2023.[10]

The price of oil continues to be volatile with prices fluctuating in the low $100s per barrel as of late June 2022. These fluctuations have created a somewhat cautious environment for oil and gas exploration.

Valuation Outlook

Gordon Brothers expects secondary market demand for exploration-related equipment will increase in certain categories and could meet pre-pandemic levels if commodity prices of oil and natural gas stabilize at or near current levels.

Appraisal values for Tier I volumes of oil country tubular goods may drop while Tier II volumes are expected to be limited or low given market conditions and a weak structural market. Additionally, the weak market may negatively affect scrap and equipment values.

[1] Federal Reserve Economic Data

[2] Federal Reserve Economic Data

[3] Federal Reserve Economic Data

[4] https://www.eia.gov/outlooks/steo/pdf/steo_text.pdf

[5] https://www.eia.gov/outlooks/steo/pdf/steo_text.pdf

[6] https://rigcount.bakerhughes.com/

[7] 29th OPEC and non-OPEC Ministerial Meeting 

[8] https://www.opec.org/opec_web/en/press_room/6882.htm

[9] https://www.iea.org/reports/russian-supplies-to-global-energy-markets/oil-market-and-russian-supply-2

[10] https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2802