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May's 88% Oil Price Spike Has U.S. Drillers Restarting Their Pumps in June

By Matthew DiLallo – Jun 7, 2020 at 11:25AM

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U.S. drillers are restarting idled wells and could soon resume their drilling activities.

The COVID-19 outbreak hammered demand for oil. That pushed prices to such depths earlier this year that several producers had no choice but to turn off some of their pumps to stop the bleeding. 

However, with governments lifting restrictions on travel and non-essential businesses, gasoline demand has started bouncing back. That's taking oil prices up with it as WTI, the main U.S. oil price benchmark, zoomed 88% higher last month. That much higher pricing level is enabling producers to restart some of their idled oil pumps. 

Oil pumps in motion at night

Image source: Getty Images.

Mission accomplished

As crude prices plunged, Parsley Energy (PE) pressed regulators in Texas to enact a coordinated production cut to help ease the growing oil storage glut. While that state decided not to force producers to curtail their output, many did so voluntarily, including Parsley. Overall, Parsley shut in about 26,000 barrels of oil per day (BPD) in May, which was significant for a company that produced an average of 126,600 BPD during the first quarter.  

However, with oil prices bouncing back sharply over the past month, Parsley now plans to restore a vast majority of this curtailed output in early June. Meanwhile, with WTI currently above $30 a barrel, Parsley could resume drilling and fracking activities. While the company isn't "putting new capital to work," according to CEO Matt Gallagher in an email to Bloomberg, its stabilized activity plan would see it ramp up activity at $30 WTI. Under this strategy, Parsley could operate four to five drilling rigs and one or two fracking crews, which is enough to complete 15 to 25 new wells per quarter.

Flipping on the switch on pumps and rigs

Fellow producers WPX Energy (WPX) and EOG Resources (EOG -1.10%) also shut in some production as oil storage facilities filled to the brim in May. WPX Energy curtailed 30,000 BPD during the month after producing 150,000 BPD in the first quarter. Meanwhile, EOG Resources shut in 125,000 BPD in May after pumping an average of 483,000 BPD during the first quarter.

However, with oil prices rebounding and demand picking back up, these companies are restarting their idled oil pumps. They're also starting to resume their drilling activities. For example, WPX Energy reaffirmed its plan to exit this year operating six rigs. While it doesn't currently plan to bring back any well completion crews, this strategy will allow it to build an inventory of drilled but uncompleted wells that it can finish when oil prices are even higher. 

EOG Resources, meanwhile, is quite a bit more bullish. The company recently stated that it plans to "accelerate" production in the second half in anticipation of a further rebound in crude oil prices. EOG also closed some of its oil hedging contracts to capture the upside of the second-half price recovery it sees ahead. 

Cautious optimism

Oil producers across the U.S. curtailed a meaningful portion of their production last month because the industry was running out of room to store excess oil, which put intense pressure on pricing. However, with demand picking back up, pricing has rebounded sharply. That's enabling drillers to restart their idled oil pumps as well as consider the resumption of their drilling activities.

If oil keeps rising, those moves could allow these drillers to cash in during the second half of the year.  

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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EOG Resources, Inc. Stock Quote
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WPX Energy, Inc. Stock Quote
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Parsley Energy, Inc. Stock Quote
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