The broader oil and natural gas industry is on its heels. As Exploration and Production (E&P) firms clamor to prepare for reserve-based borrowing resets in the spring season (“redeterminations”), they will be dealing with debt providers that are already reeling with problems and are bracing for more to come. Creativity, cost cutting, good negotiating skills and clear forward strategy will help many survive, however an increasingly number of companies will face insolvency, bankruptcy and potential liquidation.
A recent report by Deloitte outlined a review of more than 500 E&P firms and estimated that up to 35 percent (more than 175 out of 500) were at a “high risk” of going bankrupt. Those 175 firms together had amassed more than $150 billion of debt.
Likewise, the broader Oilfield Services (“OFS”) sector may be hit even harder. Without reserves in the ground as an underpinning, drilling rigs and related service equipment values are plummeting. Active U.S. land rig count continues to drop, now below 500, down more than 60 percent from 2015. As a side note, 48 percent of current U.S. land rig count is in Texas and 34 percent of all U.S. land rigs are operating in the Permian Basin.
With the broad global dynamics at work and the potential for terrorist or military/political events that could have immediate impact, it is no surprise to find a wide range of oil price predictions. The chart below prepared by the U.S. Energy Information Administration (EIA) provides an interesting view, with a WTI forecast somewhere near high $30’s to $40 [latest annual average estimate $37] through 2016 and an average somewhere near $50 through 2017. The NYMEX futures upper and lower confidence intervals also reflect reflect incredibly wide price ranges.
Global oil production and stocks (inventories) have continued to grow and have been a major driver of softening oil prices since the middle of 2014. With recent prices for WTI fluctuating around $30 per barrel, we have seen some of the lowest prices since late 2003. North America unconventional shale production has been a key driver of the increase in global petroleum stocks and has in many ways been a wildcard in the production equation which has allowed the U.S. to reclaim a production capacity previously unimagined. By the same token, the often high decline rates and relatively short investment horizons make the tight oil or shale-plays increasingly sensitive to price volatility. These dynamics are hammering the U.S. oilfield at present. The EIA’s recent forecast suggests an increase in annual global production by 1.0 million b/d in 2016 and 0.3 million b/d in 2017. In other words, the likelihood that production will continue to increase, even if modestly, in the next two years essentially suggests that demand will be in the driver’s seat for the near term.
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