• Category Archives Energy
  • More On The Investment Prospects In The Current Low Oil Price Regime

    Sustained, low oil price regimes have in the past led to mergers and acquisitions in the oil and gas sector. During the 1990s for example, when oil prices fell to as low as US$10 per barrel, mergers and acquisitions such as Chevron and Texaco, BP and Amoco, Total and Elf, Exxon and Mobil, among others were realized.

    Crude oil prices fell by an average of more than 50% between June and December of 2014. Although they have since recovered, they are still more than 40% lower than last year’s highs. The impact of that price slump on the oil and gas industry has however been quite severe: among others, more than 120,000 jobs have been lost and spending cuts have been in excess of US$114 billion.

    Crude Oil Prices

    With substantial financial and other resources, the major Integrated Oil Companies, IOCs, have outperformed other groups in the current oil price regime. For example, their downstream (Refining and Marketing, R&M) performances have countervailed upstream (Exploration and Production, E&P) losses.

    Among the tight oil (and mostly E&P) operators, the impact of the oil price slump has been more severe. In this group are the shale and oil sands producers in the United States and Canada respectively. In addition to the higher production breakeven prices, many in the group are saddled with high degrees of financial exposure. They had borrowed heavily against their assets to finance operations; but with the oil price slump, the values of those assets as well as production revenues have tumbled.

    If low oil prices endure, some of these companies may invoke second-tier adjustments; this could enable companies with great financial muscle and complex, higher-cost operations to acquire quality assets at low prices. Viewed in the light of current market fundamentals, global oil price rebound would most probably be slow and protracted. Continue reading  Post ID 364

  • 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