November Edition: A Macro Update on Crude Oil

Transcription

1 3 November Edition: A Macro Update on Crude Oil Everyone has been following the price of crude oil over the past few months, which is down over 29% since June 2014 and is the core driver of drilling activity and capex spending in the United States. For the November edition of Founders Oil & Gas Services Newsletter 1, we provide a macro update on crude oil by detailing the current situation, the fundamental drivers, Wall Street s reactions, and implications for oilfield service providers. Chronological Overview. Brent Crude (global benchmark) and West Texas Intermediate or WTI (the U.S. benchmark) have fallen over $37 and $31 per barrel respectively in the past five months, with WTI trading at a threeyear low of $7 per barrel (see chart below). Major drivers of the price decline have been the increase in global supply combined with the continued slowing growth of China and Saudi Arabia s announcement that the country would not cut production to support prices, as the Kingdom appears to be using this as an opportunity to regain global market share. We overlaid recent oil prices with significant developments from the past seven months and provided further insight below: Prepared by: Duane Donner ddonner@foundersib.com Joe Brady jbrady@foundersib.com John Ortstadt jortstadt@foundersib.com Brandon Pilot bpilot@foundersib.com Ben New bnew@foundersib.com WTI PRICE PER BARREL ($USD) $115 $110 $105 Iraq: Launch of ISIS offensive Libya: port to reopen Iraq: US strike start OPEC supply increasing Saudi cut oil price to Asia Saudi cuts oil price to US $100 $95 $90 $85 $80 $75 $70 May14 Jun14 Jul14 Aug14 Sep14 Oct14 Nov14 Source: CapIQ, Goldman Sachs & Founders O&G Research Team Jul. 2 Libya rebels sign agreement to reopen two eastern oil ports after blocking shipments for over a year; enabling crude oil exports to reach the global market. Chronological Overview continued on page 2 1 The information in November s Newsletter current as of November 18, 2014 Pipeline construction in Saudi Arabia s Ghawar Field 1

2 Chronological Overview (cont d): Jul. 4 WTI is still trading at $104/bbl, but the potential of oversupply if geopolitical unrest calms in the Middle East is being noticed. Bloomberg releases an article titled US Seen as Biggest Oil Producer After Overtaking Saudi Arabia where Fransico Blanch, Head of Commodities Research at BofA noted, Typically such a large energy supply growth should bring prices lower, but in fact we re not seeing that because the whole geopolitical situation outside the USis dreadful. Aug. 29 WTI closes at $94/bbl; concern continues to grow over increasing supply. Bloomberg releases an article showing that OPEC oil output hit a oneyear high in August, led by growth from Nigeria, Saudi Arabia and Angola Oct. 2 WTI drops to $90/bbl as global demand is being called into question. The NY Times article Oil Prices Continue Decline, Pressured by Saudi Action to Defend Market Share stated, The increase in global demand for oil this year is turning out to be slower because of weakerthananticipated growth in China and Europe. Nov. 4 WTI drops to $77/bbl as Saudi Arabia unexpectedly cut prices for crude sold to the U.S. and raised prices for other locations, including Asia. This action can be interpreted as the country taking aim at U.S. shaleoil production rather than being driven by supply and demand. Nov. 13 WTI falls to a three year low at $74/bbl off rising domestic inventory levels and OPEC s seemingly unwillingness to reduce output to reduce the supply glut. In a Bloomberg article, the Head of Energy OTC at LPS Partners remarked, The Saudis haven t said whether they are going to cut or not. There is a bearish feeling in the market and we got another wave of selling after the inventory numbers. Pricing Projections. Wall Street has revised pricing projections with the recent decline. While there are several unknowns when projecting future oil pricing (e.g., geopolitical unrest), we have gathered a few of the Street s projections and provided their summarized theses below: Goldman Sachs expects prices to bottom in 2Q15 when global oversupply will be largest reaching $80/bbl [Brent] and WTI prices $70/bbl. They believe Saudi Arabia will wait for evidence of a slowdown in the shale production growth to meaningfully curtail production and this will occur at $75 per barrel. Raymond James projects WTI to bottom in 4Q15 at $70/bbl, while trading at a $20/bbl discount to Brent. They believe the discount will be a result of the US running out of capacity to refine the light sweet crude production. Credit Suisse believes the prices will reach their lowest levels in 1Q15 and rebound to an average of $87/bbl for the remainder of THE INCREASE IN GLOBAL DEMAND FOR OIL THIS YEAR IS TURNING OUT TO BE SLOWER BECAUSE OF WEAKERTHAN ANTICIPATED GROWTH IN CHINA AND EUROPE, WHILE OIL SUPPLIES REMAIN STRONG FRANSICO BLANCH, HEAD OF COMMODITIES RESEARCH, BANK OF AMERICA Crude Oil Pricing original vs. updated projections $USD per barrel original updated original updated original updated original updated original updated 1Q15 1Q15 2Q15 2Q15 3Q15 3Q15 4Q15 4Q15 FY1E FY1E WTI Raymond James $95.00 $80.00 $85.00 $75.00 $90.00 $75.00 $70.00 $70.00 $90.00 $82.00 Goldman Sachs $90.00 $75.00 $70.00 $90.00 $75.00 $90.00 $75.00 $80.00 Credit Suisse $92.00 $77.00 $93.00 $85.00 $98.00 $90.00 $87.00 $8.00 $85.00 $82.00 Brent Crude Raymond James $ $90.00 $ $90.00 $ $90.00 $ $90.00 $ $90.00 Goldman Sachs $ $85.00 $80.00 $ $85.00 $ $85.00 $90.00 Credit Suisse $ $87.00 $ $92.00 $ $95.00 $ $92.00 $95.00 $90.00 Source: Goldman Sachs, Raymond James, Credit Suisse Updated pricing projections in blue 2

3 Jan2011 Jul2011 Jan2012 Jul2012 Jan2013 Jul2013 Jan2014 Jul2014 million bpd million bpd A Deeper Look at the Fundamentals. The global oil market is experiencing increasing oil production (supply) and weakening demand. Historically, Saudi Arabia has been called upon to balance the global oil market by cutting production and buoying prices. However, the rising production in the US has triggered the Saudis to protect market share by maintaining high production and lowering prices to slow production elsewhere. While the Kingdom s fiscal budget is supported by prices around $8590 per bbl (Brent), Saudi Arabia can still profit from oil at $30 per barrel (or lower), and appears willing to run a deficit for longterm gain. This strategy could be aimed to slow US production, but also could be targeted at Russia and Iran concerning the political tension and supremacy in OPEC. Additional factors influencing today s pricing are summarized below: Supply Increasing global supply has been driven by growth in production from the United States and more recently, the resurgence of Libya, Nigeria, and Iran. Further details: U.S. posted the biggest increase in oil production of any country last year, increasing just under 1 million barrels per day, which coincided with falling US imports (i.e., less oil purchased from Saudi Arabia) Over the past few months, Libya has increased production from a few hundred thousand barrels per day ( bpd ) to just under 1 million bpd In 2013 and the first half of 2014, geopolitical unrest limited production in countries like Nigeria, Libya and Iraq lowering global supply and buoying higher prices. In the 2H14, eased tension has allowed production to increased 37 LIBYA OIL PRODUCTION 1 thousand bpd Q2014 2Q2014 3Q2014 4Q2014 Projected 1 Production above includes crude oil, NGL & ethanol Source: Goldman Sachs 11 UNITED STATES VS. SAUDI ARABIA CRUDE OIL PRODUCTION US CRUDE OIL IMPORTS VS. PRODUCTION 9 8 Saudi Arabia United States Source: EIA 7 Demand The United States, the world s largest consumer of oil, is now importing 35% less crude than in 2005 due to the shale boom (see graph to right). While the US is sourcing more oil from its own soil, the country s demand is not increasing at the same rate of production. As aforementioned, the weak global demand growth was primarily driven by a stagnant European economy, slower than expected growth in China, and a marginally improving US economy. 5 4 Imports Production Source: EIA 3

4 Implications. The potential affects on oilfield service providers could start to take hold in 2015 as E&P s readjust strategies and capital budgets. However, depending on the service provider s geographical and customer makeup, the impact of lower pricing may be customer and location specific (although we expect operators as a whole to use this as an opportunity to drive service cost lower). Joe Brady, Director of Founders Oil & Gas Practice noted at a recent roundtable, Companies with geographic exposure to the Eagle Ford, Marcellus/Utica, Permian, and parts of the Bakken are wellinsulated from a total rigstacking event. I foresee a greater pinch coming to oildirected providers in the Midcontinent region than those aforementioned, as well as more exploratory plays like the TMS (Tuscaloosa Marine Shale). Further adding, Companies should examine their customer composition because highly levered, smaller E&P s will face the greatest adversity. However, operators balance sheets have begun to strengthen over the past few years, reducing some pressure to cut spending during a downturn. Further detail: In a recent resiliency test, Credit Suisse looked back at 2014 activity and transposed a $75/bbl price scenario. The projects that would have been deemed uneconomical at this price accounted for 11% of production volume in the Eagle Ford on a weighted basis, and 21% and 31% production volume risk in the Permian and Bakken, respectively. An example of this is Halcon Resources Corp., who plans to pull rigs out of the TMS in 2015 to focus on their core (and more economical) plays, the Eaglebine/Eagle Ford and the Bakken/Three Forks. Additionally, E&P s will seek cost saving services, equipment and technology one example is HESS Corp who said they are now using sand proppant, rather than moreexpensive ceramic proppant to optimize cost in certain shale formations. Further, the company is projecting growth, even during the current pricing environment. Chief Executive, John Hess stated, "Even at current prices or below, there's still many areas for attractive investment in the Bakken" Adding, "We're positioned well to capitalize on growth. WTI OIL BREAKEVEN PRICE ($USD PER BBL) COMPANIES WITH GEOGRAPHIC EXPOSURE TO THE EAGLE FORD, MARCELLUS/UTICA, PERMIAN, AND PARTS OF THE BAKKEN ARE WELLINSULATED FROM A TOTAL RIGSTACKING EVENT. JOE BRADY Current WTI Price 1 : $7/bbl Sources: Founders O&G Research Team, EIA, Forbes, WSJ, Rig Zone, Goldman Sachs, Morgan Stanley, Raymond James, CapIQ 1 As of 11/18/2014 Source: Credit Suisse 4

5 Select M&A Transactions Announced Date Target Buyer/Investors Total Transaction Value ($USDmm) Nov Smith International, Inc., Certain Assets Logan Oil Tools, Inc. Nov M2 Renewables, Inc. RDX Technologies Corporation (TSXV:RDX) 14.0 Nov Baker Hughes Incorporated (NYSE:BHI) Halliburton Company (NYSE:HAL) 39, Nov JW Wireline Company FTS International, Inc. Oct Argo Sales Ltd. Peninsula Pacific Strategic Partners LLC Oct Oct Express Energy Services Operating, L.P. Geospace Technologies Corporation (NasdaqGS:GEOS) Apollo Global Management, LLC (NYSE:APO) Amvona Fund, LP,Lemelson Capital Management, LLC Source: CapitalIQ 5

6 Commodity Prices Crude Oil WTI Price per Barrel Crude Oil $75. $82.0 $94.49 (7.8%) (19.9%) Natural Gas Henry Hub Price per MmBtu Natural Gas $4.44 $3.95 $ % 19.8% Source: CapitalIQ

7 Rig Counts 2,250 2,000 1,750 1,500 1,250 1, Onshore Rig Count Rig Count U.S. Onshore 1,87 1,81 1, % 10.2% Offshore Rig Count Rig Count U.S. Offshore (8.8%) (13.3%) Source: Baker Hughes 7

8 Rig Counts (continued) 2,500 2,250 2,000 1,750 1,500 1,250 1, U.S. Rig Count by Basin Permian Eagle Ford Williston Marcellus Mississippian Granite Wash Haynesville DJ Niobrara Utica Cana Woodford Barnett Fayetteville Arkoma Woodford Ardmore Woodford Others U.S. Rig Count by Basin U.S. Rig Count by Basin YTD Change Others 511 Others 78 Ardmore Woodford Ardmore Woodford (4) Arkoma Woodford Arkoma Woodford 1 Fayetteville 9 Fayetteville 0 Barnett 23 Barnett (11) Cana Woodford 34 Cana Woodford (2) Utica 50 Utica 12 DJ Niobrara 3 DJ Niobrara 13 Haynesville 42 Haynesville (1) Granite Wash 58 Granite Wash Mississippian 77 Mississippian 2 Marcellus 80 Marcellus (5) Williston 193 Williston 8 Eagle Ford 208 Eagle Ford (20) Permian 58 Permian 100 Source: Baker Hughes 8

9 Rig Counts (continued) 1,750 U.S. Oil vs. Natural Gas Rig Count 1,500 1,250 1, Oil Rig Count Natural Gas Rig Count Rig Count Oil 1,578 1,590 1,385 (0.8%) 13.9% Natural Gas % (5.4%) 140 Gulf of Mexico Oil vs. Natural Gas Rig Count Oil Rig Count Natural Gas Rig Count Rig Count Oil (15.9%) (11.9%) Natural Gas % (18.8%) Source: Baker Hughes 9

10 (Bncf/d) (Mm bbl/day) Domestic Production Crude Oil Production Million Barrels per Day Current (Oct) Prior Month Prior Year Prior Month Prior Year Crude Oil % 15.9% Natural Gas Production Billion Cubic Feet per Day Current (Oct) Prior Month Prior Year Prior Month Prior Year Natural Gas % 4.3% Source: EIA 10

11 FOUNDERS INVESTMENT BANKING IS A MERGER AND ACQUISITION FIRM WITH AN OIL AND GAS SERVICES PRACTICE THAT BRINGS A WALL STREETLEVEL OF SOPHISTICATION TO THE WELL SITE. ITS TEAM'S PROVEN EXPERTISE AND PROCESSBASED SOLUTIONS HELP COMPANIES AND BUSINESS OWNERS ACCESS CAPITAL AND PREPARE FOR AND EXECUTE LIQUIDITY EVENTS TO ACHIEVE SPECIFIC FINANCIAL GOALS. O&G SERVICES LEAD ADVISORS: DUANE DONNER MANAGING DIRECTOR DDONNER@FOUNDERSIB.COM JOE BRADY DIRECTOR JBRADY@FOUNDERSIB.COM JOHN ORTSTADT BUSINESS DEVELOPMENT JORTSTADT@FOUNDERSIB.COM BRANDON PILOT ANALYST BPILOT@FOUNDERSIB.COM Duane Donner from his recent trip to the oilrich Middle East. SAMPLE O&G TRANSACTIONS: BEN NEW ANALYST BNEW@FOUNDERSIB.COM FOUNDERS INVESTMENT BANKING, LLC 2204 LAKESHORE DRIVE BIRMINGHAM, AL Securitiesrelated services, including M&A advisory for transactions involving stock or debt are offered through M&A Securities Group, Inc., Member FINRA & SiPC. Founders Investment Banking & M&A Securities Group are not affiliated entities. Principals of Founders are registered investment banking agents with M&A Securities Group & shall perform such services on behalf of M&A Securities Group.