After listening to several of the conference calls and skimming several transcripts (CHK, EOG, RRC, WLL, CLR, APA, MRO, PXD) so far I think there are a number of broad take-aways from the US focused E&P sector.
1) The bigger companies like APA, PXD, MRO are predicting flatish growth this year, with some quarter over quarter declines towards year end. These companies tend to be spending about within cash flow, meaning that they don't need new financing to fund their capex program.
2) Other companies like WLL, RCC, CHK are running negative cash flow but still growing at quite a rapid pace in some cases (not CHK).
3) In many cases the companies say they are waiting for either service costs to come down OR oil prices to go up. They don't need both to happen to increase activity levels, even at the current strip.
Overall, if prices don't go down further it looks like the E&Ps have avoided any real 1980s style bloodbath. Smaller service companies and offshore drillers may still see some bankruptcies or recapitalizations. A few of E&Ps also may still go bust. Energy XXI, Tullow (international), Bill Barrett Corp, ZAZA, Swift, Sandridge and several others are trading like they might go under. None of these are companies that I'm particularly familiar with.
I also will again point out that we will see massive efficiency gains this year in the US unconventional producers. This will be due to operational improvements, technological improvements, and service price declines. If oil gets back to $70 a year from now, that may be as profitable for the on-shore unconventional producers as $90 WTI was a year ago, as has been noted in some of the calls. The most at-risk projects may be the offshore, where we have seen consistent cost growth in recent years, as tight oil sees cost per barrel produced decline. Remember that tight oil is still only about 7 years old, and still seeing dramatic improvements. Deepwater has been around for decades now, and the easy gains in efficiency are probably behind us. So deepwater and tight oil may have similar breakevens right now, but who will have the advantage 5 years from now? The answer to that question seems fairly obvious. Ultradeepwater may be more at risk of being the victim of the current price environment than the unconventional on-shore producers. This is one of the reasons why I'm not really looking at the deepwater drill ship operators like RIG and ESV. The other main source of high cost oil, oil-sands, seems also to be surviving without too much trauma.
If this is as bad as it gets, has OPEC simply lost its nerve? Was their goal only to put a bit of the fear of god into the western E&P companies? Because if their goal was to derail US shale, $50 oil for 6 months is not enough. It may be that the Saudis either don't have the stomach or don't have the ability to drive the price down to where it would need to go to truly cause distress to the US producers. I remain on the sidelines, with inventories continuing to build every day, but I must admit that I am starting to find myself looking at companies to buy rather than thinking about who would be the best short.
1) The bigger companies like APA, PXD, MRO are predicting flatish growth this year, with some quarter over quarter declines towards year end. These companies tend to be spending about within cash flow, meaning that they don't need new financing to fund their capex program.
2) Other companies like WLL, RCC, CHK are running negative cash flow but still growing at quite a rapid pace in some cases (not CHK).
3) In many cases the companies say they are waiting for either service costs to come down OR oil prices to go up. They don't need both to happen to increase activity levels, even at the current strip.
Overall, if prices don't go down further it looks like the E&Ps have avoided any real 1980s style bloodbath. Smaller service companies and offshore drillers may still see some bankruptcies or recapitalizations. A few of E&Ps also may still go bust. Energy XXI, Tullow (international), Bill Barrett Corp, ZAZA, Swift, Sandridge and several others are trading like they might go under. None of these are companies that I'm particularly familiar with.
I also will again point out that we will see massive efficiency gains this year in the US unconventional producers. This will be due to operational improvements, technological improvements, and service price declines. If oil gets back to $70 a year from now, that may be as profitable for the on-shore unconventional producers as $90 WTI was a year ago, as has been noted in some of the calls. The most at-risk projects may be the offshore, where we have seen consistent cost growth in recent years, as tight oil sees cost per barrel produced decline. Remember that tight oil is still only about 7 years old, and still seeing dramatic improvements. Deepwater has been around for decades now, and the easy gains in efficiency are probably behind us. So deepwater and tight oil may have similar breakevens right now, but who will have the advantage 5 years from now? The answer to that question seems fairly obvious. Ultradeepwater may be more at risk of being the victim of the current price environment than the unconventional on-shore producers. This is one of the reasons why I'm not really looking at the deepwater drill ship operators like RIG and ESV. The other main source of high cost oil, oil-sands, seems also to be surviving without too much trauma.
If this is as bad as it gets, has OPEC simply lost its nerve? Was their goal only to put a bit of the fear of god into the western E&P companies? Because if their goal was to derail US shale, $50 oil for 6 months is not enough. It may be that the Saudis either don't have the stomach or don't have the ability to drive the price down to where it would need to go to truly cause distress to the US producers. I remain on the sidelines, with inventories continuing to build every day, but I must admit that I am starting to find myself looking at companies to buy rather than thinking about who would be the best short.
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