David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Musings from the Oil Patch April 7th 2020

    Thanks to a subscriber for this report by Allen Brooks for PPHB which may be of interest. Here is a section:

    When we look at the company’s costs and expenses per barrel of oil equivalent (BOE), we find they totaled $14.01 for 2019.  Based on the company’s average oil price (which was not adjusted for its gas output given its low price), this translates into a cash profit margin per BOE of $36.88.  If we include the cost of depreciation, depletion and amortization expense (largely a non-cash expense), but indicative of the amount of investment the company needs to make to insure it replaces produced barrels and remains an ongoing enterprise, the cash profit per BOE falls to $19.06, or 37.4% of the average selling price after adjusting for hedging.  That is a pretty attractive return.  

    With WTI oil futures prices falling to $20 per barrel, and assuming the location and quality discount remains at $6, Whiting Petroleum was looking at generating no positive cash from the oil it produced.  It also assumes cash operating expenses remain at 2019 levels.  This means Whiting Petroleum would be unable to invest in new exploration and development, which makes the company a self-liquidating entity.  In that condition, the company essentially has no value.  The bankruptcy filing indicates that reality, as current shareholders will only retain 3% of the shares of the reorganized company, as the debt holders will hold 97% in return for agreeing to cancel their bonds.  

    Under today’s very depressed oil and gas prices, few producers will be able to fund operations.  If the companies have a significant amount of debt on their balance sheets, they will face serious challenges to sustain their businesses if they do not address their financial leverage.  To understand the precarious health of the producer sector, energy consultant Rystad has prepared a chart showing the debt maturity schedule and annual interest expense for a group of 29 significant producers.  While this represents only 29 producers, we believe it is indicative of the financial condition of the balance of the producer sector.  

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    Email of the day - on renewables

    ETFs TAN and FAN: what is your opinion on the quality of the constituents in both products? I do believe going forward this be a huge trend. but how many companies will make it to the other end? thanks very much for educating us in these turbulent times!

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    Saudi Will Only Cut Oil Output if Others Do, EA's Sen Says

    This article by Laura Hurst for Bloomberg may be of interest to subscribers. Here is a section:

    “It’s very clear that Saudi Arabia is maintaining its position - it will cut only if everyone else cuts,” Energy Aspect’s Amrita Sen says in a Bloomberg TV interview.

    Russia does not see benefit in cutting production given the 20m b/d drop in demand “No way” Saudi Arabia can cut enough to compensate for such a decline

    NOTE: Sen speaks following U.S. President Donald Trump’s tweet saying he expects Saudi Arabia and Russia to cut production by 10m bbl

    There could be a deal later in the year, but it’s too early as it is unclear how low demand will go; “There’s a lot of hope and expectation rather than anything concrete”

    Market will correct through market mechanisms; Energy Aspects believes world will run out of storage in May, producers will then have no choice but to shut production, but prices will remain low

    It’s unlikely that the U.S. would ever join Russia and Saudi Arabia in coordinated cuts

    “How do you get the U.S. to join something that it would call a cartel?”; there are thousands of producers in the U.S., so it would be impossible for the country to cut

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    Enevate's silicon-anode batteries promise ultra-fast EV charging

    This article by Loz Blain for New Atlas may be of interest to subscribers. Here is a section:

    With some US$111 million in investment from major companies, including LG, Samsung, Mitsubishi, Renault and Nissan, Enevate now says its cells are ready for the big time. In an interview with Charged EVs, Park said Enevate is designing packs for the 2024 and 2025 model years to get its cells into consumer products with major manufacturers. There are no announcements around who or what exactly they're making packs for, but the list of companies above may be instructive.

    As far as we're aware, though, the infrastructure to support blast-charging at the kinds of rates we're talking about here simply doesn't yet exist. Tesla's V3 superchargers are currently capable of blast-charging a Model 3 at 250 kilowatts, which would give you around 133 km (83 mi) of range in five minutes.

    These batteries would charge three times faster, at around 0.75 megawatts, which is a huge power draw. An alternative method might involve trickle-charging massive supercapacitors all day at slower rates so they've got enough energy to supply the cars super-quickly when they need it, but we're yet to see anything like that in action, and the size of those supercapacitors might end up being prohibitive.

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    Email of the day on where private equity sees opportunity:

    Thank you for the excellent commentary received daily! A question for your view - PE industry claims $2trillion "dry powder" available for deployment but can this be LP drawdown commitments which still has to be called & will come from liquidating other investments at current market prices or even defaulting on obligations?

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    Precious Metals: Navigating uncertain times

    Thanks to a subscriber for this report from RBC Capital Markets which may be of interest. Here is a section:

    Boeing Plans Full Drawdown of $13.825 Billion Loan

    This article by Paula Seligson for Bloomberg may be of interest to subscribers. Here is a section:

    Boeing obtained the loan from a group of banks last month to help it deal with its cash burn while it prepares to return its 737 Max plane to the skies. It initially tapped about $7.5 billion of the debt, and is now expected to draw the rest, said the people, asking not to be named discussing private information. Boeing plans to draw the remainder of the loan as a precaution due to market turmoil, one of the people said.

    Companies affected by the virus are increasingly turning to banks for short-term financing to provide a safety net. United Airlines Holdings Inc. raised $2 billion in new liquidity with a secured term loan, while Norwegian Cruise Line Holdings Ltd. recently signed a new $675 million revolver. Should credit conditions worsen, more firms may start to draw down their credit lines, market watchers say. Boeing’s loan came about before Covid-19 spiraled into a global crisis and was expected to be fully drawn eventually.

    “They want to have cash on the balance sheet,” said Bloomberg Intelligence’s Matthew Geudtner. The Max grounding, the company’s joint venture with Embraer SA and looming debt maturities will also weigh on Boeing’s cash hoard, he said.

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    Rosneft Plans to Increase Output as Russia Digs in for Price War

    This article by Jack Farchy for Bloomberg may be of interest to subscribers. Here is a section:

    Last week in Vienna, ministers from Russia, Saudi Arabia and other members of the group left a fractious meeting with no deal to continue the cuts beyond April 1. Saudi Arabia heavily discounted its oil over the weekend, triggering a plunge of more than 20% in international crude futures.

    Rosneft’s London-listed shares dropped 19.5% on Monday, while markets in Moscow were closed for a public holiday. In a separate statement, Russia’s finance ministry said that the country’s oil-wealth reserves would be sufficient to cover lost revenue “for six to 10 years” at oil prices of $25 to $30 a barrel.

     

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    Covid-19 and Global Dollar Funding

    Thanks to a subscriber for this edition of Zoltan Pozsar and James Sweeney’s report for Credit Suisse on the plumbing of the global financial sector. Here is a section: