• Category Archives Energy
  • 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

  • Three Critical Investment Issues For The Current Oil And Gas Market

    The precipitous fall in global crude oil prices over the past nine months has led oil and gas companies as well as investors to strategically appraise their operations and portfolios respectively. While oil and gas companies have been restructuring ― paring capital expenditure, divesting assets, laying off staff, deferring or cancelling projects, etc ― investors have been mulling over stocks for value optimization. At present, there is some disconnect between oil and gas company stocks and global crude oil prices: for example, a recent Financial Post report shows that stocks on the Standard and Poor’s/TSX Energy Sector Index are priced at an all-time high of 65 times expected earnings (more than double those for their United States peers); and according to World Oil (3/25/2015):

    Since Dec. 15, stock values in an index of 20 U.S. producers have bounced back an average 7%, even as oil fell another 15% to $47.51/bbl on Tuesday.

    With global oil prices key to such appraisals, three critical issues will most probably define oil and gas investment in the near term:

    1. Oil Supply

    The recent oil price slip has been driven in the main by a surplus in global production of, and a weak global demand for the commodity; the greater proportion of this surplus derives from unconventionals in the United States (shale) and Canada (oil sands). Many shale operators in the United States hedged their production and this has led to continued output in spite of the slide in oil prices. In Canada, the Canadian Association of Petroleum Producers, CAPP, expects oil sands production for 2015 to exceed that of 2014.

    Weekly U.S. Ending Crude Oil Stocks In the United States, after ten consecutive weeks of stock buildup, estimates of the current oil imbalance (excess of output over consumption) stand at between one and two million barrels per day, most of which is being put away in storage facilities; but with stock levels testing the capacities of these storage facilities, the imminent shutdown of refineries for spring maintenance will further increase that oil imbalance, exerting further downward pressures on oil prices.

    2. Availability of Capital

    According to a report by Pricewaterhouse Coopers, during the seven years to 2012, unit capital productivity Continue reading  Post ID 295