• Category Archives Oil and Gas
  • 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

  • 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