Friday, April 10th, 2020
Happy Friday and welcome to Energized, your weekly look into the geopolitics, news, and happenings of energy markets.
Before diving into this week’s content, we’d like to remind you to join our Energized LinkedIn Group. We will be releasing frequent news and snippets of Energized newsletters through the group. We hope to see you there. Also, if you haven’t already, visit our website to gain access to our free Oil 101 introductory course, our popular series of mobile-ready videos describing “How the industry works.” Ready for more? Check out our in-depth Oil 201 course which covers exploration, drilling, production, well completions, and refining. If your company or group is interested in Oil 101, let’s talk. We license our courses for use as internal training for sales, IT and operations teams. Think you know someone who would enjoy this newsletter? Pass it on! They can subscribe and access our Energized archives.
Now, onto this week’s issue.
Curated weekly oil and gas newsletter
Oil Prices and Markets
Light, sweet crude (dollars per barrel): $28.34
Last week: $21.51
Natural Gas (dollars per million British thermal units): $1.621
Last week: $1.634
Rig count (United States): 664
Last week: 728
+ OPEC+ agree to 2-month, 10 million b/d production cut – Oil & Gas Journal
“The Organization of the Petroleum Exporting Countries and other oil-producing countries including Russia reached an agreement on Thursday’s teleconference to cut production by 10 million b/d in May and June. The cuts amount to 10% of total crude supply.”
Saudi Arabia will cut 3.3 million bpd.
Russia will cut 2 million bpd.
In many ways, the supply issue of the COVID-19 induced oil crash has been partially solved by yesterday’s OPEC+ decision to cut production. Although the cut is only for two months, it should reduce desperate and “creative” attempts by oil traders to store oil ( more on that later). Prices could very well stabilize in the $30s.
On the demand side, things aren’t much better. Delta Airlines, which was the largest U.S. airline by market capitalization until the coronavirus stock selloff, expects its Q2 2020 revenue to fall 90% as its fleets remain mostly grounded. Aside from that, global supply chains, a lack of work-related and recreational transportation, and production cuts have dropped demand significantly (see Energized #48 and Energized #49).
The article cites a great quote from Mike Sommers, the American Petroleum Insitute’s (API) president and CEO:
“Following strong US diplomacy and reduced domestic production driven by market conditions, we welcome today’s OPEC+ decision for government-owned oil companies to cut production by 10 million b/d for a 2-month period. While this move will help stabilize world oil markets, significant challenges remain throughout the supply chain since current market disruptions are driven largely by this historic drop in demand as a result of the COVID-19 pandemic. The best thing for the energy industry – and the entire US economy – is to slow the spread of COVID-19 and stimulate the economy until demand stabilizes and it’s safe for Americans to return to work.”
The Group of 20 meeting of energy ministers is happening today so we’ll know more about the world’s response to OPEC’s cuts very soon.
Oil Inventory and Storage
+ Overflowing oil tankers are causing traders to eye rail cars – The Houston Chronicle
The widening contango market structure has made short-term cargo deliveries cheaper than those scheduled for later delivery (see Energized #49 and Energized #51). This has led to everyone from North American producers to refiners to traders to store oil wherever they can. With crude tanks and supertankers filling up fast, the article says that rail cars have been targeted for storage.
One of the first rules of economics is that a rational market will respond to incentives. The majority involved assume that oil prices will be higher in the future than they are today, and therefore, will do anything they can to delay selling crude until a later date. The article notes that research firm, IHS Markit, believes that the world will run out of storage by the middle of the year.
According to the article, the last time rail cars were used to store crude was during the 2016 price rout.
This article is an interesting look into the lengths that traders will go to take advantage of price discrepancies.
+ Administration seeks offers of crude oil for SPR by March 26 – Oil and Gas Journal
In response to the saturation of the oil storage market, the Strategic Petroleum Reserve (SPR) has “issued a solicitation to buy up to 30 million bbl of domestic crude oil from US producers.” Although a step in the right direction, this would only represent around three days of 2019 U.S. production.
The motion to fill the SPR with as much crude as possible is a helping hand to small to midsize producers that lack the trading resources or deep pockets to handle a prolonged price glut.
According to the article, the SPR has 77 million additional barrels, in total, of spare capacity.
+ EIA: U.S. crude oil inventories up 15.2 million b/d – Oil & Gas Journal
“US commercial crude oil inventories, excluding the Strategic Petroleum Reserve, increased by 15.2 million bbl for the week ended Apr. 3 compared with the previous week, the Energy Information Administration said.”
+ “Dead Cow” oil play is, well, dead now – The Houston Chronicle
Argentina was hoping to have its version of the shale rich Permian Basin in its Vaca Muerta, or “Dead Cow” play. A $1.8 billion investment program for 2020 based on $60 crude is just one of many programs that are now on pause with prices below $30. If prices get back to where they were at the beginning of the year, Argentina could have some serious runway with its 1 million or so bpd of shale potential.
+ IHS: North American E&P companies cut spending 36% in 2020 – Oil and Gas Journal
“North American E&P companies plan to reduce spending in 2020 by 36% relative to 2019 levels, translating to a $24.4-billion cut in 2020 compared to last year, according to IHS Herold calculations.”
“The cuts in spending will figure in discussions at the Apr. 9 OPEC+ meeting and the potential new grouping of “OPEC+ plus G20.” Unlike other countries, the US government cannot mandate cutbacks. But market economics and logistical constraints are mandating the cutbacks reflected in the “Big Cut” in company spending.”
+ Banks could start seizing shale assets – Oilprice.com
The exploration and production (E&P) companies that chose to abstain from debt-driven growth strategies and instead fund growth with operating cash flow are few and far between. Instead, the strategy for many E&P companies was simple: Take on debt to acquire a large number of shale assets that, with scale, achieve a low breakeven cost-per-barrel.
Yet, there’s a lot of dubious assumptions with this strategy. The first is that the price of oil will be higher than the breakeven. Many of the shale plays breakeven at $40 or less per barrel, but that doesn’t do much good if oil is below that. The second assumption is that their return on invested capital will be higher than the interest rates on the debt needed to achieve that scale, a crippling mentality if cash flow grinds to a halt, which it will as long as oil remains below breakeven levels.
This article notes the $200 billion in debt that is backed by shale company assets, and the chance that banks could begin seizing these assets in an effort to scrounge what value they can from bankruptcy prone shale players. The supermajor equivalent, as discussed in Energized #51, consists of three main options:
- Cut spending
- Cut share buybacks
- Cut the dividend
Or a combination of all three if things get really bad. So far, most supermajors are doing the first two. Cutting a dividend, as GE did in 2018 and many pipelines, including Kinder Morgan, did in 2016, is seen as the last resort when a company simply has no other option unless it wants to pay its dividends with debt.
For example, based on 2019 numbers, Exxon’s dividend payments were just a smidge higher than its total annual net income but nearly 3 times free cash flow (FCF), whereas BP’s dividend payments were 70% more than its net income but less than its FCF. IF Exxon or BP simply accumulates more debt to avoid losing the revered accolade of consistent dividend increases as a means to appease investor sentiment in the short-term, it could damage their balance sheets over the next few years.
+ China’s “recovering” wind industry stands to lose 2GW of power generation in 2020 – Energy Live News
The COVID-19 pandemic is affecting China’s once tenacious investments in the wind industry.
The article cites research by GlobalData that suggests “the renewable energy sector could see a reduction of 2GW in installations in 2020.”
“This drop in installation capacity is attributed to a halt in manufacturing and engineering, procurement and construction services.”
Have a great weekend!
EKT Interactive Managing Editor