Guest Post by Art Berman at The Petroleum Truth Report
The U.S. rig count increased by 19 this week as oil prices dropped below $48 per barrel–the latest sign that the E&P industry is out of touch with reality.
Getty Images from The New York Times (July 26, 2015)
The last time the rig count increased this much was the week ending August 8, 2014 when WTI was $98 and Brent was $103 per barrel.
What are they thinking?
In fairness, the contracts to add more rigs were probably signed in May and June when WTI prices were around $60 per barrel (Figure 1) and some felt that a bottom had been found, left behind in January through March, and that prices would continue to increase.
Figure 1. Daily WTI crude oil prices, January 2-July 24, 2015. Source: EIA and NYMEX futures prices (July 21-24).
Even then, however, the fundamentals of supply, demand and inventories pointed toward lower prices–and still, companies decided to add rigs.
In mid-May, I wrote in a post called “Oil Prices Will Fall: A Lesson in Gravity”,
“The data so far says that the problem that moved prices to almost $40 per barrel in January has only gotten worse. That means that recent gains may vanish and old lows might be replaced by lower lows.”
In mid-June, I wrote in a post called “For Oil Price, Bad Is The New Good”,
“Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.”
Oil prices began falling in early July and fell another 6% last week. Some of that was because of the Iran nuclear deal, the Greek debt crisis and the drop in Chinese stock markets. But everyone knew that the first two were coming, and there were plenty of warnings about the the Chinese stock exchanges long before July.
The likelihood of lower oil prices should not have been a surprise to anyone.
Of the 19 rigs added this week, 12 were for horizontal wells (Figure 2) and 7 of those were in the Bakken, Eagle Ford and Permian plays that account for most of the tight oil production in the U.S.
Figure 2. Rig count change table for horizontal wells. Source: Baker-Hughes and Labyrinth Consulting Services, Inc.
Horizontal shale gas plays added 8 rigs. That is as out-of-touch as the tight oil rig additions since gas prices averaged only $2.75 in the second quarter of 2015 (Figure 3) and are almost half of what they were in the first quarter of 2014.
Figure 3. Henry Hub natural gas daily prices and quarterly average prices.
Source: EIA and Labyrinth Consulting Services, Inc.
The U.S. E&P industry is really good at spending other people’s money to increase production. It doesn’t matter if there is a market for the oil and gas. As long as the capital keeps flowing, they will do what they do best.
Don’t be distracted by the noisy chatter about savings through efficiency or re-fracking. Just look at the income statements from first quarter and it’s pretty clear that most companies are hemorrhaging cash at these prices. Second quarter is likely to be worse and it gets uglier when credit is re-determined in Q3, hedges expire, and reserves are written down after Q4.
This is an industry in crisis despite the talk about showing OPEC a thing or two about American ingenuity. Increasing drilling when you’re losing money and prices are falling doesn’t sound very ingenious to anyone.
Watch for the markets to agree as oil prices fall lower in coming weeks.
Energy Companies Face “Come-To-Jesus” Point As Bankruptcies Loom
Submitted by Tyler Durden on 07/26/2015 09:29 -0400
Last week, amid a renewed bout of crude carnage, Morgan Stanley made a rather disconcerting call on oil.
“On current trajectory, this downturn could become worse than 1986: An additional +1.5 mb/d [of OPEC supply] is roughly one year of oil demand growth. If sustained, this could delay the rebalancing of oil markets by a year as well. The forward curve has started to price this in: as the chart shows, the forward curve currently points towards a recovery in prices that is far worse than in 1986. This means the industrial downturn could also be worse. In that case, there would be little in analysable history that could be a guide to this cycle,” the bank wrote, presaging even tougher times ahead for the O&G space.
If Morgan Stanley is correct, we’re likely to see tremendous pressure on the sector’s highly indebted names, many of whom have been kept afloat thus far by easy access to capital markets courtesy of ZIRP.
With a rate hike cycle on the horizon, with hedges set to roll off, and with investors less willing to throw good money after bad on secondaries and new HY issuance, banks are likely to rein in credit lines in October when the next assessment is due. At that point, it will be game over in the absence of a sharp recovery in crude prices.
Against this challenging backdrop, we bring you the following commentary from Emanuel Grillo, partner at Baker Botts’s bankruptcy and restructuring practice who spoke to Bloomberg Brief last week.
* * *
Via Bloomberg Brief
How does the second half of this year look when it comes to energy bankruptcies?
A: People are coming to realize that the market is not likely to improve. At the end of September, companies will know about their bank loan redeterminations and you’ll see a bunch of restructurings. And, as the last of the hedges start to burn off and you can’t buy them for $80 a barrel any longer, then you’re in a tough place.
The bottom line is that if oil prices don’t increase, it could very well be that the next six months to nine months will be worse than the last six months. Some had an ability to borrow, and you saw other people go out and restructure. But the options are going to become fewer and smaller the longer you wait.
Are there good deals on the horizon for distressed investors?
A: The markets are awash in capital, but you still have a disconnect between buyers and sellers. Sellers, the guys who operate these companies, are hoping they can hang on. Buyers want to pay bargain-basement prices. There’s not enough pressure on the sellers yet. But I think that’s coming.
Banks will be redetermining their borrowing bases again in October. Will they be as lenient this time around as they were in April?
A: I don’t know if you’ll get the same slack in October as in April, absent a turnaround in the market price for oil. It’s going to be that ‘come-to-Jesus’ point in time where it’s about how much longer can they let it play. If the banks get too aggressive, they’re going to hurt the value for themselves and their ability to exit. So they’re playing a balancing act.
They know what pressure they’re facing from a regulatory perspective. At the same time, if they push too far in that direction, toward complying with the regulatory side and getting out, then they’re going to hurt themselves in terms of what their own recovery is going to be. All of the banks have these loans under very close scrutiny right now. They’d all get out tomorrow if they could. That’s the sense they’re giving off to the marketplace, because the numbers are just not supporting what they need to have from a regulatory perspective.
I work in the oil industry in Canada.
The well I am on is a commitment well…if we drill we maintain the rights to 32 sections of land for 3 to 5 years (not sure which).
If we let the licence expire, we loose the rights to the 32 sections…it goes back to auction…we can either try and purchase what we had the right too, or someone can bid higher and secure the rights.
Could there be a similar system where the rig count has increased in the States?
Price crashed in June as it plummeted below support at $80 in late Nov. 2014. Price fell to a low in Mar, then rose, then fell and is close to a double bottom and divergence on MACD. There is a good chance for a bounce up this week or in next few weeks in CL (WTI crude futures).
Dave ,you should check in more often. Let us know how the oil industry is really doing. I drive for FedEx and every where I go I see oil rigs pumping. Somebody is making money.
Admin is still steamed about my fracking article, which pummeled the bejesus out of him.
“Don’t be distracted by the noisy chatter about savings through efficiency or re-fracking.”
—-from the article above
Excuse me, but I’ll remain distracted, thank you very much. I’ll also remain distracted by much lower labor and equipment costs. Distraction is one of my better qualities.
Here is my take on fracking.
The environmental groups are telling us in a very loud voice why fracking is bad. The chemicals we use to frack are extremely bad for the environment. Fracking causes earth quakes. It is polluting our ground water.
The media uses all these points and goes forward in spreading the word.
I understand that theses are not nice consequences of fracking. But I think these concerns are at best a smoke screen by people who really don’t have a clue.
From the people I have talked with, in the industry, some where between 70 and 90% of water used for fracking is never recovered over the life span of the well. This water will eventually make it up to the surface for us to use again, might be in several thousand, several hundred thousand years…I don’t know for sure.
We are taking a finite resource, essential to life on the planet, and effectively taking it out of our ecosystem for millennium.
I think the oil companies, governments…anyone who profits from oil production is happy the green people are spouting off about pollution…it hids the real scary truth
When you make a deal for an oil and gas lease you most often agree to drill a well within an agreed upon time frame. In the old days that was often 10 years but during the boom of the late 70’s and early 80’s things got very competitive and that time frame was often reduced………..some times to 90 days. Drilling commitments of 90days to five years have become quite common. If you establish production on your lease it’s yours for as long as you produce oil and that can be anywhere from 20 to 50 years. One well can hold thousands of acres of high potential well sites. If you have some super hot leases you will not let them go just because the price of oil is low.
High oil price or low oil price the 1%er’s are really the only ones who have ever had the money to invest in high cost risky things. Those 1% er’s have more jack than ever before so funding a truly good prospect that has long term development potential can still be done. We only care about what people with lots of money or who can get that money think and do. What anyone else thinks or has to say doesn’t mean shit.
This year my old partner and I have leased two prospects (not shale) that we have been keeping tabs on since about 2007. The two leases went undrilled and expired. We snapped them up.
Due to the depressed state of the oil business we were able to get them on a ten year lease. We will wait for the oil prices to rise some but even if prices stay low for the next 10 years these two prospects will get drilled before that 10 years is up. And if they look good after drilling we will frac the piss out them.
As for fracking it’s been going on for almost 100 years in one form or another. Oil and gas drilling can be environmentally destructive especially in the immediate area of a well. I drilled many prospects in the desert areas of west Texas and you will probably be able to see those well sites from the air for the next 1000 years. And that is being as careful as possible with the environment.
Before coming down on drilling and fracing and the problems it can cause people should think about these things as the progressive libtards do not.
1) do you drive a car or use any form of transportation.
2) do the things you purchase such as food and clothing and everything else require any form of transport to get to the stores.
3) Do you use anything imported from over seas by ship or plane.
4) Do you use anything made all or in part of plastic?
No drilly, no Fracky then an 1800’s life style is for you.
You can thank the shale prospect swindlers, their crazy ass criminal bankers and their stuck with the bill moron investors drilling and fracing all over the place along with the scum of the earth Saudis for oil prices that are anywhere near affordable. Think the oil business is full of thieves, frauds criminals,idiots and crazy bastards? It’s always been that way. What would things be like without it?
Did you see this? I find it hard to believe they would do this if they thought a recovery was anywhere in sight. http://www.msn.com/en-us/money/news/shell-is-axing-6500-staff-and-selling-dollar20-billion-in-assets-to-compete-with-the-oil-price-slump/ar-AAdHNFs?ocid=iehp