How Prepared Are You For Oil And Gas Price Crisis?

Well-hedged oil and gas companies are best prepared to endure this downturn in the near term, but the longer the low-price environment continue, the greater the likelihood that many in the industry won’t survive, an analyst said.

“The hedges that are in place between $50 and $60, that is meaningful,” said Bernadette Johnson, vice president for strategic analytics at Enverus, during a webinar on March 12. “That does provide some protection for the first part of the year. It’s not going to save all these operators, certainly, and there are operators [in the Enverus analysis] that are not hedged.”

But almost all of the hedges in place for the 63 operators studied begin to expire at the end of this year.

“Post-2020, that hedge protection starts falling off a cliff,” Johnson said. “Even for the operators that are well-hedged, it’s relatively short term, and the longer that these low prices persist, the more balance sheets that are in trouble.”

Survival Tips

Who should worry? Johnson boils it down to three questions:

• What is your debt-to-EBITDA ratio?
• How well hedged are you?
• How much debt do you have to roll over?

“If you are a Chevron, if you are a ConocoPhilips and you’re sitting on a pile of cash, you can weather this storm longer, even if you’re not as well-hedged,” she said. “If you have a lot of debt to roll over, and your market cap just crashed by 50%, 90%, that’s a significant challenge that a lot of these operators will have to overcome.”

The plunge in price doesn’t make it easy. Only a few areas in the Permian Basin and the Bakken Shale have breakevens that work at the current price level and those, Johnson said, are fairly well drilled out.

So far, she said, shale isn’t dead because the market is working the way it is supposed to work. Prices are low, so operators are pulling back. When prices recover, they will return and add rigs quickly, which is what happened during the last recovery in 2017.

Game Theory

But is that the best strategy for an operator? That depends.

“If you decide to pull back right now as a U.S. operator, you’re essentially betting on Russia and Saudi Arabia not being able to solve this very quickly,” Johnson said. “It’s game theory. If you pull the trigger too soon, even though you’re covered, then this is resolved quicker than people are thinking, then you’re at a disadvantage relative to your competitors.”

But don’t get your hopes up about a rapid rebound.

“Prices are not going to recover quickly,” she said. “We’re having a hard time seeing a lot of upside in 2020.”

Those who still believe the shock of the March 9 meltdown will fade quickly will be forced to embrace reality by June, Johnson said, and then take drastic steps.

For those in the oilfield service (OFS) sector, well, duck and cover.

“The OFS market was having a tough time before the price collapse, just with the pullback in activity,” she said. “We were running about 1,200 rigs in the U.S. back in November of 2018. By the end of 2019, we had cut that number by 25%.”

Less activity means less drilling, less need for services, pullback in rigs and pullback in crews. That was already happening.

“This really just exacerbates that,” Johnson said. “If you look historically at what happens when prices first collapsed several years ago, it really is OFS that usually takes the hit first.”

There are exceptions: water-handling companies in certain areas of the Permian Basin may still do well. For most, however, tough times have arrived.

Longer Term Outlook

The longer-term outlook to 2022-2023 is brighter, though. Long-term demand trends for both oil and natural gas are increasing in the Enverus forecast. In that picture, shale plays can come back into money and you can have rig counts return, Johnson said.

In an odd twist, this setback could be just what the oil and gas industry needs.

“This might be the type of event that helps shake loose capital markets,” Johnson said. “If you think about it—a lot of these assets—what was the challenge before? Not a lot of transactions happening, not a lot of money in the space.”

That could make it a good time to get back into energy if you’re on the sidelines, she said. Johnson believes traditional investors will wait and see, but others might perceive a significant change in the market: the wide spread between asking bid and ask isn’t so wide any more. Now you might see some transactions get done, she said.