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As one of the largest oil-field service companies in the world,Halliburton Company (NYSE: HAL) deeply embeds itself into most of the world's biggest oil companies. Because of that, it has its finger right on the pulse of its customers. That gives it unique insight into their plans, which it can aggregate into a detailed view on the future of the oil market. Here's what it sees up ahead.
A wait-and-see approach
On Halliburton's recent third-quarter conference call, CEO Dave Lesar provided listeners with the company's updated view of the oil market. He started with a reminder:
In other words, while $50 oil is the pivot point for customers to start thinking about putting rigs back to work, they needed to have confidence that crude will remain above that level before they ratcheted up their capex budgets to add more rigs. That has certainly played out in the relationship between oil and the rig count this year:
As Lesar noted, while the rig count has started to increase, producers are methodical in their approach to ramping activities. For example, leading Midland Basin producer Pioneer Natural Resources (NYSE: PXD) announced last quarter that it planned to increase its rig count from 12 to 17 during the second half of the year. However, Pioneer Natural Resources planned to slowly add rigs to its fleet, with it scheduled to add one in September and two each in October and November. That slow approach is because Pioneer and its rivals did not want to add too many rigs early on in the recovery in case it was another false bottom.
The holiday hold before the new year's rush
Next, Lesar provided his view as to what lies just over the horizon for the industry. He said:,
As Lesar points out, its customers are not rushing out to add more rigs now that oil seems to have stabilized around $50 a barrel. Instead, they are actually planning to take a break from drilling activities during the holidays because the economics of drilling during that time frame are not as good because of all the starts and stops. That is because drilling speed is a crucial factor in getting well costs down and drilling returns up. For example, leading shale driller EOG Resources (NYSE: EOG) has achieved an average of a 46% reduction in average drilling days in its Delaware Basin oil play since 2014, which has contributed to a 43% drop in completed well costs. Because of that drop in costs, EOG Resources can earn a 30% after-tax rate of return at flat $40 oil on its best drilling locations in that play.
Furthermore, EOG Resources' returns improve to 60% once oil tops $50 a barrel, which is compelling enough for the company to restart its production growth program. As a result, starting next year EOG Resources plans to deliver 10% compound annual production growth through 2020 as long as oil stays above $50 oil.That said,EOG Resources is not alone in targeting a return to growth at $50-plus oil. Joining it is Pioneer Natural Resources, which plans to deliver 15% compound annual production growth through 2020. In fact, Pioneer can achieve that growth rate while remaining cash flow neutral by 2018 at roughly $55 oil. Likewise, Canadian driller Encana (NYSE: ECA) sees $55 oil fueling long-term sustainable growth. According to its latest five-year forecast, Encana envisions delivering 60% liquids growth by 2021. Many other producers are putting out long-term production forecasts with an aim to restart growth next year as long as oil is above $50, which certainly aligns with Halliburton's view.
Halliburton continues to believe that once oil is sustainably above $50 that producers will start ramping drilling activities. That is certainly playing out in the rig count as companies like Pioneer are cautiously bringing back rigs. That said, it does not see a significant ramp-up in activities until 2017, when companies like EOG Resources plan to begin ramping back up. While that means that the fourth quarter will not be that great for Halliburton, it seems to suggest that 2017 could be a big year for the sector.
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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources and Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.