2020 Pandemic & The Great Depression
When the pandemic hit in 2020, natural gas producers were significantly cutting back on capital spending and laying off employees. “Significantly” may be an understatement as many oil and gas producers, especially oil producers, argued that the 2020 downturn was the worst ever downturn for the industry. The May 2020 WTI crude oil futures contract settled and expired below zero at -$37.63 on April 20, 2020. That had never happened before in the history of the WTI crude oil futures contract, which began trading in 1983. Even during the Great Depression, oil prices got as low as 46 cents a barrel in the spot market. One key difference between the 2020 downturn and the Great Depression is that the 2020 downturn was very brief due to the massive monetary and fiscal stimulus responses, whereas the Great Depression was very prolonged due to mistakes in monetary policy (central banks were too slow to increase money supply according to Milton Friedman) and in fiscal policy (the federal government increased trade tariffs with the Smoot-Hawley Tariff Act of 1930). The real stock market crash wasn’t the 1929 crash, but instead was the 1930-1932 crash where the stock market fell 90% until it bottomed in November 1932. The stock market did not go back to its 1929 highs until 1954, 25 years later. The brief 2020 crash fully recovered its losses 5 months later in August 2020.
2020 Producer Response & 2021-2022 Divergence
During 2020, both public and private producers were in full retrenchment mode on a roughly equal basis. Both types of producers cut back dramatically on capital spending and employees. However, once the recovery began in the early part of 2021, a divergence commenced between the private and public producers. Private producers started to significantly expand their fracking activity, while public producers did not expand their fracking activity.
Private producers began expanding fracking activity in 2021 while public producers kept their fracking activity roughly unchanged. The difference has grown even larger in 2022 as private producers continued to significantly expand fracking activity while public producers kept their fracking activity steady.
Rig activity has also diverged among private producers and public producers.
Rig activity among private producers has increased much faster than rig activity from public producers. In early 2021, both rig counts and fracking crews were roughly the same among private producers and public producers. However, now in late 2022, private producers have much higher rig counts and fracking crews than public producers. The especially large difference in rig counts among private producers is also highlighted in the number of DUCs.
Private producer DUCs have been rapidly expanding while public producer DUCs have been rapidly falling since early 2021. It used to be that public producers had more DUCs than private producers but that is no longer the case thanks in large part to the much higher rig activity from private producers.
The main reason why private producers have been expanding fracking and rig activity faster than public producers is due to the implementation of ESG policy on public companies. ESG is a corporate philosophy which stands for Environmental, Social, and corporate Governance. It is a practice that first began to be implemented in the public corporate world roughly 20 years ago and has accelerated more recently into the public energy industry with climate change policy becoming more and more influential in the US and Europe. ESG has had very little implementation in the private corporate world, especially among private oil and natural gas producers. ESG has been implemented in a systematic manner by Wall Street and most prominently by the CEO of Blackrock ($8.5 trillion in Assets Under Management as of June 30, 2022), Larry Fink. Larry Fink is also known as the King of ESG, and some consider him to be the most powerful unelected man in the world. Oil and natural gas producers fall under the E for environmental in ESG. It is commonly known that public oil and natural gas producers are told by Blackrock and Wall Street to be disciplined on production growth or else producers will be ‘punished’ by Wall Street by selling their stock and by conspiring with banks to not do any future financing with public producers who step out of line and produce more than ‘what they should’. Whether this is true or not, one thing for sure is that ESG is influencing public producers and it has recently accelerated very quickly as evidenced by the number of times ESG is mentioned in earnings conference calls.
It is interesting to note how the acceleration in the number of times ESG is mentioned in public company earnings calls coincides with the beginning of the divergence between public and private producer fracking and rig activity in early 2021.
Public and private producer activity has diverged significantly since early 2021 in fracking, rig and DUC activity. The implementation of ESG among public producers is the dominant reason for the divergence. However, more private companies are getting bought out by public producers as evidenced by the acquisitions of Indigo Resources by Southwestern Energy, Vine Energy by Chesapeake Energy and THQ Appalachia by EQT Corporation. The recent trend of more private producers getting bought out by public producers along with the divergent philosophical and political differences between private and public producers bodes for interesting times ahead for the oil and natural gas industry.