Some Thoughts on Oil & Gas Activity - International

Rig count Internationally

As an investor, I look for mispriced bets. I tend to be somewhat industry agnostic as long I feel that I can get an understanding of the mechanics of the industry. Though I like to take long term concentrated bets on individual businesses, I have taken top down bets when I feel it's appropriate. Parts of the Oil & Gas industry is something that I feel I understand well enough to commit capital to. As such, I follow the rig count consistently to sniff out a potential disconnect between share prices and activity. I prefer to find more service focused companies rather than producers, so the focus on marginal drilling activity drives the businesses.

This post will take a quick look at the industry with a emphasis on international rig count.

Demand

Like any commodity, oil is subject to supply and demand. Though there are differences in the types oil in the various geographies, oil supply and demand should be looked at globally (in my opinion of course). When prices stay below the marginal cost to extract oil then we see underinvestment and vice versa when prices are high.

Here is one (of many) sites that provides supply and demand numbers.

Supply

Obviously the cost curve is important. Below is a global comparison with the average cost of production in 2020.

You can purchase a very detailed report here, although I just stole the free image.

Looking at the cost curve at a set point in time can be misleading. Currency fluctuations, transportation infrastructure, refinery capacity, remaining reserves, unplanned additional supply, depletion rates, EV transition cadence, local government agendas and political risks are some of the thing I try to keep in mind when investing in the space. EIA gives regular updates like this one.

Historical Prices

Of course, price drives investment. Though this post talks about International rig count, I can only find inflation adjusted data for WTIC. Regardless it provides some interesting context.

OPEC

You can't google anything related to oil without getting a bunch of news on OPEC and what they are doing or planning to do with supply. Understanding the intentions of OPEC at any point in time is difficult. Countries come and go, production is raised or lowered, and sometimes the countries can't agree on production quotas.

I have no advantage over anyone else in predicting what OPEC will do or won't do. Therefore, I don't trade off short term news and expectations. I wouldn't go so far to say that I ignore what OPEC is doing, but I tend to focus on what happens and what the impacts are after that. I have made premature decisions when OPEC says they will raise or lower production, only to get caught off guard when it doesn't happen.

Rig Count Globally

Interesting to see the role that the various geographies have played in the contribution to the total rigs being utilized. Also noting that the total rigs deployed peaked in the 1980s. Given the equipment required to extract oil has only increased in complexity, we can see how many drilling rigs are needed today relative to the past. One could make the argument that we are underinvesting in oil discovery and production today, but the count is still lower throughout the 2000s than the late 1970s and early 1980s.

Looking at the previous chart in an area form, the US drilling activity from the 1970s proportional looks pretty impressive.

The spillover effects from the 1973 oil embargo made a lasting impact through time, though it was officially lifted in 1974. The devaluation of the US dollar coupled with the supply reduction drive prices higher. I'm going to go a little more about the US into this in a separate post.

When removing North America from the global rig count with monthly data rather just annual average, gives an interesting perspective on activity. The Middle East has been growing rig count while Latin America is utilizing lower than previous.

How I Think About the Industry

I have found that over the years I utilized EIA more and more as I tend to find myself following data and not speculation on what will or won't happen. Understanding the type of investor I am and my behavior to news and price swings is important if I want to commit capital to the industry. I find the focus on service companies, having a 9-24 month timeframe, invest with high integrity management teams, focus on stable balance sheets and keeping positions small is the what works for me.

Anyone else follow the rig count closely?

Dean