• Why The Recent Oil Price Rally Is Unsustainable

    Crude oil prices have risen by about 40% over the past weeks after falling to a six-year low. Spot prices for Brent for example, were US$62.82 per barrel on 11 May 2015, up from US$46.09 per barrel on 22 January 2015, Energy Information Administration (EIA) data show. While some investors mull over prospects, others consider it the beginning of a sustained price rebound. United States ― mostly shale ― operators, for example, have been gearing to restart operations after idling about 60% of drilling rigs over the past few months. Such optimism however, is not supported by current market fundamentals.

    Crude Oil Prices - Brent, WTI


    Global oil demand is unlikely to rise significantly in the near term. China, a principal driver for global energy prices is projected to see only a 3.1% rise in fuels demand next year, compared to 11% in 2010, after the 2009 price slump, according to the EIA. The country’s economic growth rate for this year is projected to be the slowest since 2008. Goldman Sachs Group expects the year’s growth in crude oil demand (1.5%) to lag that in supply (1.7%), with an oil balance ― excess of supply over demand ― of +1.2 million barrels per day (MMbpd). Continue reading  Post ID 353

  • Oil And Gas Companies: Repositioning In A Low Oil Price Regime

    The investment value of oil and gas companies’ stocks is evidenced in a recent Sonecon report. According to the report, on average, US$1 invested in oil and gas stocks in FY 2005 by the two largest public employee pension funds in each of 17 American states was worth US$2.30 in FY 2013; by contrast, US$1 invested in all other assets over the same period was worth US$1.68. The recent oil price slide however, has impacted oil and gas companies.

    Global oil prices plunged steeply over the past nine months to a near six-year low. In response, oil and gas companies have employed such cost-cutting measures as reduction in capital expenditure (capex) project deferrals as well as staff layoffs, among others. According to Wood Mackenzie, the result has been a 24% reduction year-on-year in capital costs for the industry. It added that the price required for companies to be cash flow neutral in 2015 was cut by more than US$20 per barrel (US$/bbl) to US$72/bbl; however average oil prices for Q1 2015 were US$53.91/bbl (Brent) and US$48.54/bbl (WTI), data from Energy Information Administration, EIA, reveal.

    In its 2014 Global Upstream Performance Review, IHS Energy reported a median loss, including dividends, of 34% for 200 publicly-traded Exploration and Production (E&P) companies as well as Integrated Oil Companies (Figure 1).

    E&Ps, IOCs - Median Total Return By Peer   Group 2014

    Three critical operational metrics show the heavy cost burden on the world’s top oil and gas companies: First, unit capital productivity ― which measures the quantity of oil produced per dollar employed ― has declined significantly. Secondly, the massive growth in upstream capex has not been met with commensurate output, and finally, the growth rate in finding and development costs has outstripped that in cash flow. The EIA reports that, for oil and gas companies listed on United States stock exchanges, finding costs for year 2014 increased by US$2.92 per barrel of oil equivalent, US$/boe. Continue reading  Post ID 337

  • The Investment Window In A Low Oil Price Regime

    Continued addition to the global oil supply glut as well as the sluggish global economy will most likely militate against any sustained price rebound in the near term. A low oil price regime presents deal windows for debt-burdened companies as well as those seeking strategic repositioning and which windows investors may also avail themselves of.

    The current crude oil price regime derives in the main, from market fundamentals: a weak global demand and a massive increase in supply. That increase in supply, over the past decade came from unconventional resources predominantly in the United States (shale) and Canada (oil sands); during that period, the petroleum group, Organization of the Petroleum Exporting Countries, OPEC, maintained output within a very narrow band.Change In Oil Production - OPEC, U.S. & Canada

    The group’s decision late last year ― driven primarily by Saudi Arabia, Kuwait, Qatar and United Arab Emirates ― not to reduce output levels in spite of the massive supply overhang, spurred what was termed in the media, a “sheik-versus-shale” turf war.

    If that decision was aimed at forcing production cutbacks among the higher-cost (unconventional) producers, then OPEC, with much lower production breakeven costs (US$10 – US$30 per barrel, US$/bbl) than United States (US$55/bbl – US$85/bbl) and Canadian (US$65/bbl – US$110/bbl) producers, has been able to do just that: of the seven key production regions in the United States for example, output for the month of March 2015 fell or remained unchanged in all but two, according to the Energy Information Administration. The rig count data as compiled by Baker Hughes is even more informative. The full rig report shows a 43% decline in U.S. rig count from the value for three months ago. Even the newly-employed operational efficiencies are not expected to countervail the effects of such steep decline rates. Production reports and rig counts are respectively, lagging and leading indicators of production trend, not withstanding imperfections in the latter. Continue reading  Post ID 315