The Phil Flynn Energy Report 10-28-2019
The U.S. shale industry is expected to be rocked by subpar earnings and reports that bankers are running away from oil shale investments. This comes as Baker Hughes reported that the number of active U.S. rigs drilling for oil fell by 17 to 696 this week. The total active U.S. rig count fell by 21 to 830, the lowest level since 2017. The drop in rigs is more evidence that U.S. oil production estimates by the EIA will have to be adjusted downward because not only is production per well disappointing, the money is also drying up.
Reuters News reports, “Investors are bracing for weaker results from U.S. shale players in the coming days as lower oil and natural gas prices and cost-cutting measures have weighed on third-quarter operations. Reuters says that, “Major shale producers ConocoPhillips (COP.N) and Concho Resources (CXO.N) this week kick off quarterly earnings reports for a group whipsawed this year by volatile pricing and investor demands for improved returns. Oil and gas producers have cut drilling and slashed jobs amid worries over pricing outlooks. U.S. oil prices are down 17% and natural gas is down about 31% from a year ago, undercutting production increases. Costs of job cuts and retiring debt also will pressure profit at some companies, analysts said ahead of reports. “I think we are moving from a growth to a value phase,” said Brad Holly, chief executive at Whiting Petroleum Corp (WLL.N) at a Denver oil conference earlier this month."
Whiting, Devon Energy (DVN.N), and PDC Energy (PDCE.O) each pared staff in recent months as prices swooned. Cutbacks have spread across the sector, with Halliburton (HAL.N), Schlumberger (SLB.N), and Patterson-UTI Energy (PTEN.O) idling equipment. Investors will be watching for shale productivity updates. Last quarter, Concho Resources’ (CXO.N) stock plunged 22% in a day after cutting its production outlook, blaming well designs that hurt output. According to Reuters.
It takes money to make money and the shale industry is finding out it is more difficult to find. Reuters says, "The largest banking lenders to the oil and gas sector are becoming more cautious, marking down their expectations for oil and gas prices that underpin loans in a move expected to put further financial stress on struggling producers, industry and banking sources said. Major banks including JPMorgan Chase <JPM.N>, Wells Fargo <WFC.N>, and Royal Bank of Canada <RY.TO> have, as part of regular biannual reviews, cut their estimated values for oil-and-gas companies' reserves, which serve as the basis for those companies to receive reserve-based loans (RBLs), according to more than a dozen sources familiar with the activity.”
Weak data in China overnight is cooling oil prices yet future draws of crude supply will be substantial. This week we should see crude supply fall by about 4.5 million barrels. Once again U.S. oil exports will surge and imports will drop. Heavy oil is in tight supply and despite worries about showing growth, the oil market keeps getting tighter and tighter. Our take is to buy breaks. Supplies of distillates are so tight and the IMO regulations are going to cause a squeeze. Gasoline supply is also tight as demand is very strong. Get hedged.
Natural gas is popping as winter is coming early. Yet the drive to get a piece of the global LNG market continues. According to “THE MARITIME EXECUTIVE” a Dubai-based floating LNG company Lloyds Energy has announced plans to export liquefied natural gas from Alaska's North Slope using an offshore liquefaction terminal and icebreaking LNG carriers. The proposal would eliminate the need for a $40 billion pipeline to carry gas 800 miles overland to a liquefaction plant at Cook Inlet - a persistent cost and permitting obstacle for North Slope gas development. They say the $5 billion project is still in the planning phase but its outline is quickly taking shape.
LNG has secured a conceptual agreement with ExxonMobil for the supply of natural gas from the eight trillion cubic foot Point Thompson field for a period of 20 years. The gas is currently a stranded asset: ExxonMobil brought Point Thomson online in 2016 with production facilities designed to produce and then reinject 200 million cubic feet per day of gas, as there are no existing options for transporting it to market. The condensate is extracted and exported via the Trans Alaska Pipeline, but the gas goes back into the reservoir. The existing facility represents a $4 billion investment.