With the US West Texas Intermediate (WTI) currently below $25 per barrel (bbl), most of the US shale players are expected to bear the intensified pain at such pricing condition. Key Permian operators are being forced to reduce their capex, which is primarily lowering the number of rigs operating and crews associated with the drilling and completing of wells. Of all the unconventional plays, the Permian Basin reduction in production growth will be the largest in absolute terms and exemplifies quite well the collateral effect sought by the oil price war initiated by Russia and Saudi Arabia a few weeks ago. Given the uncertainty generated by low oil demand and the Covid-19 related economic downturn, as well as the escalating narrative between Russia and Saudi Arabia for flooding the oil market, it is very possible that US shale supply operators will further adjust their capex plans later this year, potentially causing a larger production drop during 2020 and 2021.

In our base case for the post-price fall scenario, an updated price expectation based on futures contracts, for 2020 and 2021 and 2022 is utilised. GlobalData valuations also use an updated operator-reported number of rigs for 2020 whenever available; otherwise we assume a drop in rigs of 50%.

For our sample of 36 operators accounting for approximately 75% of total Permian production, their production volume loss due to lower rigs amounts to 834 mboed (of which 555 thousand barrels per day (mbd) is oil) by the end of 2020, when compared with the pre-price fall scenario.

The reduction in number of rigs by the end of 2020 is of 128 resulting in a count of 277 versus a count of 405 rigs currently reported at end of March 2020. Overall, this rig reduction brings down operator’s capex an average of 40%.