It’s odd, isn’t it, the way the oil markets work these days? Last month, BHP Billiton exported 650,000 barrels (bbl) of Texas condensate, reportedly to Vitol, the Swiss trading firm. Pioneer Natural Resources and Enterprise Product Partners have also exported condensate.
But meanwhile, a ship containing 1 million bbls of Kurdish oil has been anchored offshore Galveston for several months now, with the fate of its precious cargo tied up in a U.S. court, as Iraq tries to forbid that oil—which was not sold through normal Iraqi government channels—from reaching its buyer.
Last month on this page I asked, Who is gonna blink first? By now, we’ve gotten some answers. Most people have been through these commodity cycles before, and if they are hedged properly, and their balance sheets are not too stretched, then they will not appear as wide-eyed as the proverbial deer in the headlights.
OPEC met recently and decided its course of action, so you know what might lie ahead going into the first quarter of 2015, as the cartel tries to confront the reality of surging supply coming out of North America just as global oil demand might be softening. But at press time (about three weeks before OPEC’s momentous meeting), some hardy analysts were already calling the bottom on oil prices and certain CEOs were taking action.
As you’ll read elsewhere in this issue (see “Capex Cuts: Will They Or Won’t They?”), several factors are at play here, including OPEC adherence to production quotas, the near-term direction of global economies, and a slowdown in the pace of U.S. oil output growth. Nevertheless, U.S. oil production will still, conservatively, grow faster this year than for any other supplier on the planet.
People have been saying for some time that a crude oil price below $75 to $80—on a sustained basis, that is—would be the starting point to lay down rigs.
At press time, with oil ranging between $78 and $80/bbl, it looked like it was already happening. In this case, caution is the better part of valor and besides, many balance sheets were already loaded up beyond investors’ comfort zone.
In the first week in November, Continental Resources (CLR) unveiled its 2015 capital program, keeping its rig count at 50 vs. a prior plan of 53, with a 2015 budget of $4.6 billion, down about 12% from 2014. Keep in mind, however, that with pad drilling and better completions, fewer rigs don’t necessarily mean less new production coming to sales.
But at the same time, CEO Harold Hamm made a bold move by monetizing all of CLR’s oil hedges in order to take advantage of a potential rally in crude prices that he believed is soon to occur.
“If you want to play oil prices at this point, why not play Continental?” asked research analyst Jason Wangler at Wunderlich Securities in Houston.
“Now that Continental has monetized its hedges, at a tidy $433 million profit, by the way, the company is truly playing the oil market. Given our thesis about oil moving back into the $90/bbl range since Saudi is the swing player, we like the move as our expectations are aligned with Continental. Additionally, the CEO recently bought stock at a higher level, which further shows the company’s conviction.”
“Clearly this is a bold move from CLR management as it draws a line in the sand on crude prices, pointing to unchanged supply/demand fundamentals and hinting at market clarity coming out of the November 27 OPEC meeting,” said R.W. Baird analyst Daniel Katzenberg in a research note.
“While time will tell, we do respect management’s conviction and decisive action, although considered a bit reckless to some. The 2015 rig count is now flat vs. current levels (50 vs. 53 prior), based on a $4.6 billion budget (down 12%), resulting in 3% lower year-over-year production growth guidance of 23%-29%.”
Meanwhile, some exploration and production (E&P) companies in the third quarter had to write down the value of their oil and gas assets on paper. Nor are the service companies immune, as evidenced by Transocean, which reported a $2.8 billion impairment charge for goodwill and the value of some of its deepwater rigs. The noncash write-down resulted from a weakening offshore market made worse by the decline in oil prices. Day rates had been trending down because of somewhat slower activity anyway, and an influx of newbuilds that tamp down rates.
The recent blockbuster natural gas wells being reported in the Marcellus and Utica plays only serve to heighten investor interest in Appalachia and in that region’s drilling and midstream economics. And finally, Shell laid some cards on the table, announcing a few days after the election that it will buy the former zinc plant in southwest Pennsylvania, with the view to building an ethane cracker on the site. Therefore, there is much to talk about and so, we hope to see you in Pittsburgh on January 27-29, for our annual Marcellus-Utica Midstream Conference & Exhibition!