If you’ve been keeping up with the news recently, you’re seen a number of capital budgets slashed in Texas. This come in response to the fact that oil has been dropping like a rock! With blood flowing in the streets now that oil has breached $50/barrel, oil and gas companies are starting to rethink how they do business. In many cases, operators are being forced to cut the amount of spending for 2015 and beyond. With lower oil prices, this means that only the highest return oil and gas investments make sense. Most operators are currently scrambling to high grade their assets and put capital to work in places that will provide the highest return for their money.
Capital budgets affect Drilling and Completion
One of the first things to get cut as capital budgets decline is the drilling activity. Why? Drilling and completion operations are the most expensive (typically) capital item in the budget. With less money to spend, oil and gas companies are now being forced to lay down rigs in Texas. They are doing this because some drilling activity that was profitable at $90+/barrel is no longer profitable when prices are below $40/barrel. With the rig count declining every day, it’s obvious that this isn’t a small event and multiple operators are taking the same course of action. The effect is that with less drilling activity also comes less leasing activity. Current leases that seemed like they would be drilled may no longer be used and the lease may expire.
One of the other effects in the industry is the decline in service company activity. It stands to reason that when drilling and completion operations decline, the service companies in Texas are going to be hit hard. These companies no longer have work that needs to be completed, and mass layoffs begin. Unfortunately, we are probably just starting to see the decline take place. Many more jobs will be lost during the Oil Bust of 2015.
Effect on Mineral Owners
What does this mean for you as a mineral owner? It means that if your property is currently leased, it’s possible that no drilling could take place. In addition, leasing activity is likely to decline significantly as there is no need to continue leasing more land. If you are holding a non-leased property right now, it may be years (even decades) before any drilling takes place. This has many people considering whether to sell mineral rights in Texas. Rather than waiting for royalties that may never come, selling is sometimes a better option.
In addition, many royalty owners are seeing a decline in their royalty checks. This is spurring many royalty owners to sell royalties in Texas. Rather than deal with inconsistent income, owners would rather get a guaranteed amount in their pocket today!
One thing is for sure. As we enter this uncertain time in the industry, it’s anyone’s guess where the price of oil will end up. With capital budgets slashed in Texas, the overall activity is likely to decline dramatically over the next 6 to 12 months.