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Like a squirrel seeking security by burying acorns for winter, we’re all hunting for data, to reassure ourselves that this downturn will be over—at some point. It’s a contrast from two years ago, when most upstream people were rushing to get their hands on a rig or frack crew to hold their acreage. They were so busy that they could barely breathe.
Today, working at the glacial pace brought on by low oil prices, E&P players no doubt have more time to conduct in-depth analyses that will lead to efficiencies and the next leg up. If we were all geniuses in a $100/bbl environment, what must we do differently now to remain just as smart at $35?
From the boardroom to the banker’s desktop to the chief restructuring officer’s war room, people are crunching the numbers and mining the data. That includes equity analysts struggling to find a Buy.
Let’s look first at some financial data, as provided each week by Seaport Global Securities. It slices and dices 110 financial metrics for 82 E&P companies, including 54 in its coverage universe. The metrics include valuation, production, reserves, 2016 financial estimates, capitalization and margins, all of which help to distinguish the lowest-cost producers.
Naturally, the E&P universe is composed of a wide variety of companies operating—or holding still—in the gamut of plays. Operators are burdened with different qualities of assets and balance sheets. While keeping this in mind as we draw conclusions, we find it useful to peek at some of the SGS numbers. The company found that the average market cap, as of the week ending January 8, was $3.8 billion, but the median was less than a sixth of that, at $520 million.
Their net debt to net market cap is about 43%. At press time, the fourth-quarter 2015 results were not yet out, but in the third quarter, their net (unhedged) realized price averaged $26.17/bbl, with lease operating expense (LOE) coming in at $7.08. Combining taxes, transportation, gathering and G&A, total costs for the group averaged $14.95/bbl, yielding an operating margin of $11.22/bbl on average. Ouch. And oil fell below $30/bbl.
Next, let’s look at some field activity in Texas, which typically accounts for about half the U.S. rig count. The Texas Railroad Commission issued 727 original drilling permits in December 2015 compared to 1,506 in December 2014, indicating the depth of the slowdown (93 of those were for recompletions). In full-year 2015, there were 19,503 well completions in the Lone Star State vs. 29,554 in 2014. The Texas rig count at January 8 was 308, said Baker Hughes. Time was, there were more rigs than that operating in the Permian Basin alone. As we’ve said before, the seeds of the next upturn are being sown now, during the downturn, with the question being timing.
The most-watched indicator for the state of our union is U.S. barrels per day. The Energy Information Administration said it expects U.S. output “to decline steadily from 9.2 MMbbl/d in December 2015, reaching about 8.5 MMbbl/d in November 2016. Production is expected to stay near 8.5 MMbbl/d for most of 2017.
“This level of production would be 1.2 MMbbl/d below the April 2015 level (which was the highest monthly production since April 1971).”
OPEC’s inflicted pain has therefore cost the oil patch some 250,000 jobs globally, by some estimates, and driven more than 1,000 U.S. rigs out of service. It has cost E&P companies billions in lost revenue.
Finally, we’ve collected predictions from a variety of sources, although no one knows for sure the outcomes ahead, and all are revising their thoughts in light of crude’s continued weakness. In a report on service companies and land drillers, Simmons & Co. International wrote, “… macroeconomic uncertainty has risen considerably even relative to the unease we felt and expressed in December. Accordingly, unassailable balance sheets have become an even greater threshold requirement.”
Barclays said on January 11, “Although we still expect higher oil prices over the second half of 2016, we see prices moving up from a lower base than we previously envisaged and on a much shallower gradient. We now expect Brent and WTI to both average $37/bbl in 2016, down from our previous forecasts of $60 and $56, respectively.”
Finally, Barclays’ annual spending survey said North American E&P capex will fall 26.6% this year, following a 35% decline last year—a 61.6% reduction over two years.
Respondents said they need $55 to complete their DUCs, the drilled but uncompleted wells.
There’s plenty of data out there, but like hidden acorns, its full meaning may be obscured for now.
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