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

    2016 Oil Market Outlook

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

    In addition to a still over supplied global liquids balance it is of course bearish that OPEC does not look set to change their output policy in the December 4 meeting. The change in Saudi policy was one of the key reasons why we held the most bearish view to oil prices in the surveys one year ago. We were early to identify 1986 as the relevant comparison since this downturn is a supply led downturn and not a demand led downturn. Hence it made no sense to us that Saudi would defend oil prices this time, since the kingdom always has seen the 1980-86 cut period as a mistake. We do not foresee a change in the Saudi tactics in the December 4 OPEC meeting since there are very visible signs that the policy is working, first and foremost through the large global CAPEX cuts hitting shale, deepwater and Canadian oil sands.

    It is also important to emphasize that we are still in a situation where there will be no contributions to a potential OPEC production cut from other than Saudi/UAE/Kuwait. Iran, Iraq and Libya is of course totally out of the picture to contribute, and how can Venezuela, Nigeria and the other OPEC countries cut back output voluntarily when their domestic economies needs the exports revenues? Since there is no sanctions on any OPEC country that does not follow the potential new quota, how can Venezuela trust that Nigeria is cutting any output?? The risk would be that Venezuela cuts and it is too small to affect the price and then revenues are falling as the exports volume is reduced. OPEC behaviour is still a lot of game theory… To us this means that the only way we could see an OPEC cut in the December meeting would be that Russia contributes to cutting production. We do not see this as very likely, noting the statements from for example the Russian Deputy Energy Minister in October where he said that Russian oil wells are mostly located in harsh climate in Siberia which means the wells will not be easy to restart after having been shut down and there is no storage capacity for the crude Russia would otherwise have exported.

    On October 21 OPEC and some non-OPEC countries held a meeting with technical experts to discuss the oil market but the meeting gathered no interest from non-OPEC countries to contribute to any production cuts. Venezuela has proposed to reapply a new price band for OPEC where production should be reduced when the price is below a 70 $/b threshold but has seen little traction so far on this idea. The response from the Saudi “pump-king” Al-Naimi was that “only the market can decide on prices, no one else”, so it does not look promising for Venezuela which will just have to tighten their belts.

    For OPEC it just makes it even more difficult that Iran is set to return to the market in 2016. IAEA must verify that Iran has implemented the nuclear agreement before sanctions can be removed. Iran must reduce the number of centrifuges from 9.500 to 5.060, move installed non-operating centrifuges into storage, dilute stock pile of low-enriched uranium from 10.000 kg to 300 kg, remove the core Arak heavy water reactor and establish verification systems across the supply chain. Iran’s supreme leader has stated that the process at Arak will not begin until the IAEA completes its investigation on past nuclear weapons work and that report is not due until December 15. We have hence factored in that the sanctions are not removed until the second quarter of 2016 in our global supply/demand balance.

     

    Read entire article

    Musings from the Oil Patch October 20th 2015

    Thanks to a subscriber for this edition of Allen Brooks’ every interesting report. Here is a section on the developing El Nino:

    Considering the weather patterns that will dominate the 2015-2016 winter, Ms. Garriss writes,” Strong El Niños normally bring warm, dry winters to the northern tier of states and Southern Canada. Meanwhile the Southern US has cool, wet winters. Large Icelandic eruptions typically bring warm winters to the Midwest, Northeast and Canada from the Great Lakes to the Atlantic Provinces. If history repeats itself, expect lower heating demands.” That is not good news for the domestic energy business, but certainly good news for homeowners. It may also be good news for underlying economic growth as the combination of lower heating bills and reduced gasoline pump prices may result in more money being spent on other products and services. 

    During the past four weeks of the natural gas storage injection season, weekly volumes have averaged 100 billion cubic feet (Bcf). As of the week ending October 9, there was 3,733 Bcf of gas in storage, which puts current storage up at the top of the five-year average weekly storage volume peak. Forecasters have been anticipating that total gas storage will end the injection season somewhere close to, or possibly slightly in excess of 4,000 Bcf. If we do exceed 4,000 Bcf, it would mark the first time in history that the industry began the heating season with that much natural gas in storage. During 2009-2013, with the exception of 2012, the industry ended the injection seasons with slightly over 3,800 Bcf of gas in storage. In 2012, the industry was able to slightly exceed 3,900 Bcf of gas in storage. Last year, the industry began the heating season with only 3,571 Bcf of gas in storage, which was due to the injection season beginning with the second lowest storage volume since 1994 - only 822 Bcf.

    Read entire article

    Saudi Arabia Said to Delay Contractor Payments as Oil Slumps

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

    The lower price of crude -- it’s fallen by about half in the past 12 months -- coupled with the kingdom’s spending plans, will leave Saudi Arabia with a budget deficit exceeding 400 billion riyals this year, according to the International Monetary Fund. The aggregate deficit for 2015 to 2017 is likely to exceed $300 billion, according to a report by HSBC. The government has ordered a series of cost-cutting measures, including a freeze on new construction contracts and bans on buying new vehicles or furniture, two people with knowledge of the matter told Bloomberg earlier this month.

    “We have already seen a pick-up in loan growth at some of the Saudi banks in Q2 as contractors borrow to fund their cash flows as a result of a slowdown in payments,” Aqib Mehboob, a senior analyst at Saudi Fransi Capital, said by phone from Riyadh Monday.

    Still, Saudi Arabia’s public debt is among the world’s lowest, with a gross debt-to-GDP ratio of less than 2 percent in 2014. Real estate stocks have also outperformed the Tadawul All Share Index. The Tadawul All Share Real Estate Development Industries Index advanced 7.5 percent in 2015 through Sunday, compared with a 6.5 percent decline in the benchmark stock gauge.

    Saudi Arabia, the world’s largest oil exporter, has led the Organization of Petroleum Exporting Countries in boosting production to defend market share, abandoning its previous role of cutting output to boost prices. The country is now storing record amounts of crude amid a decline in shipments. Exports dropped to 7 million barrels a day in August from 7.28 million in July, while commercial crude stockpiles rose to 326.6 million barrels, the highest since at least 2002, according to data posted on the website of the Riyadh-based Joint Organisations Data Initiative.

    Approximately 140 billion riyals of construction contracts were awarded in Saudi Arabia in the first half, a 12.4 percent increase compared with the first six months of 2014, according to a report by Jeddah-based National Commercial Bank.

     

    Read entire article

    Drivers Ride High on Trucking Boom

    This article by Robbie Whelan and Brian Baskin for the Wall Street Journal may be of interest to subscribers. Here is a section: 

    “Everyone is fighting over the same drivers,” said Dan Pallme, director of the Intermodal Freight Transportation Institute at the University of Memphis. “Eventually, what has to happen is salary has to rise, and the only way motor carriers can do that is by increasing the costs to their customers.”

    The long-haul trucking industry, which employs about 800,000 people today, needs an additional 48,000 drivers, according to the American Trucking Associations, a trade group. That is a tall order at a time when unemployment is falling. Many who might have considered trucking are opting for construction work, a job that doesn’t involve long stretches away from home and pays competitive wages.

     

    Read entire article

    Toyota Maps Out Decline of Conventionally Fueled Cars

    This article by Yoko Kubota for the Wall Street Journal may be of interest to subscribers. Here is a section: 

    Yet for now, Toyota is still highly reliant on gasoline- and diesel-powered cars. Last year, around 14% of Toyota’s global sales were hybrid vehicles, including plug-ins. Most of the remaining sales were vehicles powered by gasoline and some diesel, though a detailed breakdown wasn’t available.

    Toyota has posted record profits in recent years, partly thanks to growing sales of profitable but gas-guzzling sport-utility vehicles and pickup trucks in the U.S., backed by lower fuel prices.

    The vision to eliminate gasoline- and diesel-powered cars was a part of Toyota’s wider green car strategy unveiled Wednesday.

    By 2020, Toyota aims to cut carbon-dioxide emissions from new vehicles by more than 22% compared with its 2010 global average. It ultimately hopes to take that to a 90% reduction by 2050, the auto maker said.

    To do so, Toyota plans to sell roughly 7 million gas-electric hybrid vehicles world-wide over the next five years, it said. Toyota has sold around 8 million hybrids since it started selling them 18 years ago.

    Toyota also plans to sell at least 30,000 fuel-cell vehicles a year world-wide by around 2020, it said.

     

    Read entire article

    SolarCity Unveils World's Most Efficient Rooftop Solar Panel, To Be Made in America

    This press release from SolarCity may be of interest to subscribers. Here is a section:

    SolarCity will begin producing the first modules in small quantities this month at its 100 MW pilot facility, but the majority of the new solar panels will ultimately be produced at SolarCity’s 1 GW facility in Buffalo, New York. SolarCity expects to be producing between 9,000 - 10,000 solar panels each day with similar efficiency when the Buffalo facility reaches full capacity.

    SolarCity’s panel was measured with 22.04 percent module-level efficiency by Renewable Energy Test Center, a third-party certification testing provider for photovoltaic and renewable energy products. SolarCity’s new panel—created via a proprietary process that significantly reduces the manufacturing cost relative to other high-efficiency technologies—is the same size as standard efficiency solar panels, but produces 30-40 percent more power. SolarCity’s panel also performs better than other modules in high temperatures, which allows it to produce even more energy on an annual basis than other solar panels of comparable size.

    SolarCity initially expects to install the new, record-setting solar panel on rooftops and carports for homes, businesses, schools and other organizations, but it will also be excellent for utility-scale solar fields and other large-scale, ground level installations.

     

    Read entire article

    DuPont Breaking In Two After CEO Exit Seen Raising Value 31%

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

    DuPont shares surged Tuesday by the most in six years in anticipation that more value will be unlocked. The Wilmington, Delaware-based company said Kullman will be replaced later this month as both CEO and chairman on an interim basis by board member Edward Breen, who oversaw the dismantlement of Tyco International Plc.

    Earlier on Monday, Trian Fund Management, the activist investor that argues DuPont would be worth more as two companies, announced it had added to its stake in the company.

    In May, Trian co-founder Nelson Peltz led the firm in its proxy fight in a doomed attempt to get three board seats.

    "It’s kind of bittersweet, because Trian is vindicated in some respects," said Hank Smith, who helps manage $6.5 billion as chief investment officer at Haverford Financial Services Inc.

    in Radnor, Pennsylvania. "If DuPont had embraced Trian earlier on and welcomed Peltz on the board, Ellen Kullman would still be CEO."

     

    Read entire article

    Musings From the Oil Patch October 6th 2015

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section: 

    The new Imperial Oil technology involves adding a solvent to improve the flow of oil to the surface as well as generators that burn less natural gas to supply the steam. What we understand about Imperial Oil’s new technology is that currently proposed oil sands projects could produce 55,000 to 75,000 barrels a day in oil output compared to their presently planned output of 30,000-40,000 barrels a day according to Mr. Krüger. As he was quoted during the presentation,

    “This is bigger on a per phase basis than we’ve talked about in the past.” From Mr. Krüger’s viewpoint, this technology represents “a very large, long-term growth opportunity.” Even though the company seems satisfied with the new technology, it is not ready to move forward with some of these planned oil sands projects while management assesses their cost, possible changes to Alberta’s regulatory policies and the outlook for global oil prices.

    Citi Research has prepared a chart showing its assessment of the impact of technological and economic cost reductions of various oil outputs between 2014 and 2015, based on assumed 2020 output contribution, due to the industry downturn. Most of the decline since 2014 is about $5 per barrel, although Gulf of Mexico costs may have declined by $7 a barrel and the shale formations by $10 a barrel. If Mr. Krüger’s assessment of the impact on output from Imperial Oil’s new technology is correct, then there would likely be a significant reduction in the cost of new oil sands output. According to the Citi Research chart, they estimate that oil sands currently cost between $80 and $100 a barrel. However, if the Imperial Oil claims are correct and can be implemented commercially, then a 30% output improvement might translate into $25-$30 per barrel cost reductions.

    Obviously there are a number of assumptions that must be made in reaching this conclusion, including that the solvent-added SAGD process is not more costly than what is being done now and that additional output volumes require extensively larger facilities in order to handle them.
    If you are Saudi Arabia and you have targeted new, large and long-term output sources such as oil sands and deep water oil in your price war, the prospect of their costs declining materially has to be unnerving. It has been our contention that Saudi Arabia’s target was these deposits, including Arctic output, and less about the domestic shale business. Why? The shale revolution is a “real-time” output, meaning that if producers are forced by economics to stop drilling, eventually oil prices will rise, drilling will resume, as will shale output, and the price cycle will start all over again.

     

    Read entire article

    How to Fix the Offshore Drilling Industry

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

    The overwhelming consensus view is that “deepwater is dead” or structurally impaired. We strongly disagree. The tried and true path to long-term success in energy investing is to “go where the oil is” and that is in deepwater where reserve additions have outpaced shallow water by 3.2x and onshore by 45% (1.3x excluding oil sands). Our field by field analysis suggests long-term (10 year) demand for 320 floating rigs (vs. 225 currently active and a total fleet – including expected newbuild deliveries - of about 385 today). The bad news is that near-term demand remains weak with a rig-by-rig analysis suggesting demand will bottom at 194 rigs in 2H ‘16. A similar analysis of the jackup market implies trough demand of 328 by YE ‘16 (vs. a fleet of about 570 rigs).

    Reality bites: Industry to tackle structural supply issues
    Rig attrition has begun to take hold with 43 floaters retired in the current cycle to date and an additional 28 floating units cold-stacked with most of those unlikely to return to the market. Although a significant increase relative to the last several years, these actions have only removed 14% of deepwater capacity (23% including stacked units) even as roughly 75 newbuilds remain on order so the fleet will still see net growth absent more aggressive action. The news is worse on the shallow water front, where only 52 units have been retired and 57 stacked (10% and 20% of the global fleet, respectively). With the oil price testing new lows again recently, backlog dwindling and hopes for a near-term demand recovery fading rapidly, the industry now seems more realistic about the need to take more decisive action on capacity reduction. We see scope for as many as 70 floaters and 110 additional jackups to exit the fleet over the next 12-18 months, although we believe the floater market will come into balance sooner given its better secular demand outlook, higher degree of consolidation and greater differentiation between newbuild and older units.

     

    Read entire article

    Musings from the Oil Patch September 22nd 2015

    Thanks to a subscriber for this edition of Allen Brooks' ever interesting report for PPHB. Here is a section: 

    Other than public debt and equity, the E&P industry has also been seeking other sources of capital. Drawing down bank credit lines has been one avenue, but lower oil prices will mean reduced asset values, especially as some of the assets will be redlined because they have been in the undeveloped category for too long so will be considered uneconomic. With the upcoming bank loan redeterminations, we expect to see increased E&P sector financial stress. In March, the last time loan redeterminations were conducted, oil averaged $71 per barrel. Now, the average is $57 a barrel; helped by the spring run-up in oil prices. By the fourth quarter, it is possible the average oil price will be in the $40s. A 40% haircut in the borrowing base will impact 2016 E&P spending.

    The E&P industry has also lived off its earlier production hedges. As a result, some companies were being paid in the $90s a barrel for their output, but most of those high-priced hedges are running out. An analysis by investment banker Simmons & Company International and quoted by The Wall Street Journal, cited 36 U.S. oil producers with hedges covering 33% of their 2015 output at an average of $80 a barrel. Next year, those companies only have 18% of their output hedged, and at an average price of only $67 per barrel. Those high-valued hedges during the first half of this year was a reason why layoffs and G&A cuts were not severe, if at all. Management teams’ days of living in a world of unreality is rapidly coming to an end, and the pain will be severe.

    Another source of capital for the energy business has been private equity - pools of capital that can be used to start new companies, buy companies on which to build much larger companies, and to provide capital for companies to grow. Data for the past three years (Exhibit 10) shows that private equity invested $43 billion in 2012, $36 billion in 2013, but only $11 billion in 2014. Private equity deals this year have been sparse as fund managers struggle to find attractive deals in an environment in which it is difficult to assess what companies are worth. That also explains why deal-making in 2014 was down sharply from the prior two years. 

    As a result of the 2010-2014 period of high oil prices and expectations that these prices would only go higher in the future, private equity targeted the energy business due to its large capital needs. Virtually every major private equity firm raised one or more energy-focused funds. Those private equity firms who have ploughed the oil patch for years were easily able to raise large new funds off their successful track records. With billions of dollars sitting in these energy-focused private equity funds, finding and executing deals has become a high-pressure effort. 

    Increasingly, private equity managers are recognizing that this potential avalanche of capital seeking energy deals is their biggest problem. It has, and is, leading to overvalued deals. As long as this money has to be put to work due to the mandates of the funds, the pain in the industry is likely to continue. The energy business truly needs to have the capital flow turned off, not merely turned down. Only then can the industry washout occur and the healing begin. 

    Read entire article