Last week, both the Baker Hughes Weekly Rig Count and the Enverus Drillinginfo Daily Rig Count showed their largest decreases in active drilling rigs in half a year. This is a sure sign of a slowing domestic industry, and not at all surprising during this year when the benchmark price for West Texas Intermediate (WTI) has been mostly range-bound between $52-$58 per barrel, and corporate producers remain under pressure by investors to reduce their capital drilling budgets.
At the same time, the U.S. Energy Information Administration (EIA) data shows that daily domestic crude production, after peaking during April, gradually dropped from May through July. While those summer month numbers may be somewhat depressed due to multiple days-long outages in the Gulf of Mexico thanks to various hurricane events, they are still another signal that the U.S. boom is slowing.
But perhaps the surest signal of all came a few weeks ago when news began filtering out of West Texas that cheap hotel rooms were suddenly available in Midland, with rooms that went for $800 a night six months ago reportedly now down to $250, and average rooms around $130. Industry veterans in Texas know the latest oil boom is nearing its end whenever they’re able to get a room at a Holiday Inn Express or Best Western in the middle of the play area for a competitive rate.
Those hotel chains and others opened dozens of new locations in the midst of South Texas during the Eagle Ford Shale boom starting in 2009, and beginning a few years later in West Texas when the Permian boom heated up. Sleepy little towns all over those regions that had forever been home to only a couple of mom ‘n pop motels and maybe a Motel 6 suddenly had half a dozen modern, clean hotels adorning the major highway corridors on their outskirts.
Rooms at those locations quickly became very pricey as service companies like Halliburton and Schlumberger, and big upstream companies reserved large blocks of rooms for weeks or even months at a time for their employees working nearby to occupy. As a result, rates for the few hotel rooms remaining available rocketed up due to the hot competition for them. The fact that those rates are now dropping means that the competition for them has slowed along with the boom, a simple matter of supply vs. demand. It’s a very predictable cycle.
Does this mean the Permian boom is over? No, it just means that the boom will continue at a slower pace. What is happening right now is that the rig counts and drilling activity levels that drive the pace of any oil and gas boom are trying to come into balance with the current, range-bound price level.
We have to remember that the 25%-higher rig counts we saw a year ago were created based on the expectation of WTI oil prices in excess of $60 per barrel and a NYMEX natural gas price around $3.00 per Mmbtu. At some point soon – probably in the first quarter of 2020 – we will see the rig counts and drilling activity levels in the Permian and other shale plays around the country stabilize at levels that are in balance with the new expected commodity prices.
For the Permian region, that new, more stable level of activity, while lower and less intense than we saw during 2018, will still be far higher than the region saw during the depressed, down years of the first decade of this century, or during the depths of 2016, when the Permian rig count was less than 40% of its current level. It will still be in a boom time by any rational, historic comparison, but the impacts of the boom will be much more manageable for local communities, and for the industry itself.
And yes, the hotels will still be making good money; they just won’t be making it hand-over-fist like they no doubt did when the competition for their rooms was at its most intense.