Like most companies in the oil patch, Drillinginfo must adapt and recalibrate its strategies to current economic conditions. Much like our customers, we look to the data collected from sources across the industry to understand trends and adjust plans accordingly. Recently, we examined a series of market indices including rig counts, permits and leasing. After seeing a decrease of 52.2% in rig count (2,051 rigs on 11/3/14 to 979 on 5/12/15) and 40.7% decline in monthly permits (6,807 on 11/1/2014 to 4,034 on 4/1/2014), we were expecting to see the same degree of pull back in leasing activity. This is where we made a surprising discovery.Instead of a draw down in the number of leases we were expecting, we discovered that the volume has not only remained virtually the same when compared to this time last year, it is on par to equal or surpass that volume. In Q1 of 2014, we processed 64,638 leases across the 538 counties we cover. In the same quarter of this year, we have already processed 56,396 leases with several counties still yet to officially file all March leases. Even if no other leases are reported for March, there would only be a 12.7% decrease in leasing activity. This indicates that companies are looking to gain leaseholds while the market is still sluggish and unleased minerals are valued at today’s commodity prices, ultimately concluding that by the time these new leases mature to producing wells, the market will have rebounded.
In order to test this theory, we wanted to first focus our attention on the leases taken in the hottest plays across the country. To do this, we referenced the Leasing Heat Map on DI Activity Maps where we ran analyses on the Bakken, Eagle Ford, Permian and Niobrara plays.
The results seem to corroborate the theory as indicated by the data from Q4 2014 to Q1 2015:
- 18.6% Increase in Primary Term (43 mo. to 51 mo.)
- 21.1% Decrease in Royalty Interest (19% to 15%)
- 86.5% Increase in Primary Term (37 mo. to 69 mo.)
- 16% Decrease in Royalty Interest (25% to 21%)
- 17.9% Increase in Primary Term (39 mo. to 46 mo.)
- 13.1% Decrease in Royalty Interest (23% to 20%)
- 47.1% Increase in Primary Term (51 mo. to 75 mo.)
- 6.3% Decrease in Royalty Interest (17% to 15%)
By pushing the primary term out, operators are not only giving themselves more time to put together ideal units but are allowing more time for WTI to rebound and help raise capital for operations. When you couple this with the higher net revenue interest (NRI), the current glut will prove to be a time of significant opportunity for those who are able to take advantage.
So who is making the current land grab? We believe there are three main categories (or a combination of each). First are companies that are hedged and aren’t yet feeling the full bite of $40-60/bbl oil and are financially able to expand their positions. Second are those that have taken funds previously designated for further developing leaseholds currently held by production (HBP) and expanding positions elsewhere. Third are the new players. Unlike the crash in 2008 and 2009, the economy overall is much healthier. Together with low interest rates, it is an ideal time for new companies to jump into the oil and gas industry and gain leaseholds that would have been nearly impossible to acquire only a year ago.
What do you think? Leave a comment below.
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