THERE ARE SO MANY THINGS going on in the oil and gas business currently that I'm going to cover a number of issues in this month's column rather than devote the entire space to a single topic.
MAYNARD HOLT
First, the Houston Producers Forum luncheon on Aug. 11 with Maynard Holt, co-president and head of E&P investment banking at Tudor Pickering Holt & Co., as the designated speaker. Holt's presentation - "Riding the Oil Roller Coaster" - was well received by the packed house in the Petroleum Club, which was looking for a glimmer of hope amid falling oil and gas prices. He gave the industry crowd a ray of sunshine. For instance:
- The US rig drop should bring the supply/demand situation into balance next year. A drop of 900 rigs in 2015 will lead to a contraction in US oil production in 2016.
- In his case for recovery, Holt said that with no increase in US activity in 2016, the 2017 global market will be tight.
- His 2016 oil price forecast is $80/bbl. This, he said, will drive a ramp-up in activity and put 300 rigs back to work compared to 2015.
- In this market, said Holt, you can go from cold to hot pretty quickly.
Alluding to the "massive influx of capital" into the upstream sector in the first quarter of this year, which Holt said represented the "largest ever" equity issuances, he noted that investors love the Eagle Ford Shale and the Permian Basin. "A lot of people outside the US want to put their money here," he said. "There is zero confusion about what kind of real estate you should own - it's the Lower 48."
Finally, with regard to the stock market, Holt closed with a quote from investment guru Warren Buffett: "You want to be greedy when others are fearful."
RYSTAD ENERGY
One of the research firms that OGFJ partners with, Oslo-based Rystad Energy, said Aug. 27 that a Brent price as low as US$50/bbl is "not sustainable" beyond 2016.
"Our current market view is neutral to bearish in the short term, as we see a production floor at US$30/bbl," said Nadia Martin, senior analyst at Rystad. "At such a low price, the supply response in US shale production coupled with already-visible drops in infill drilling in the Gulf of Mexico and North Sea will be so severe that the price cannot remain that low for long."
Although the oil market is currently well supplied and oil supplies remain high, Rystad remains bullish in the longer term, with foreseeable price spikes for Brent by 2016. The current futures curve is trading too low for marginal producers to hedge their future production.
Rystad believes that US$70/bbl is likely "too high" an average price for 2016, but "too low" for 2017 and beyond.
MORNINGSTAR
Investment research and management firm Morningstar recently evaluated the state of the US natural gas industry. Analysts at the firm say that US gas production is likely to slow in the near term as oil-directed drilling hits the brakes, but the wealth of low-cost inventory in areas like the Marcellus and Utica shale plays in the Eastern US - as well as associated volumes from oil-rich areas like the Permian - points to continued growth in that sector. A key reason, says Morningstar, is "durable efficiency gains through faster cycle times and improved recovery rates."
Key takeaways from the Morningstar report:
- Morningstar's top picks among natural-gas-focused E&Ps are Cabot Oil & Gas, Range Resources, Antero Resources, Chesapeake Energy, Southwestern Energy, and Rice Energy.
- Morningstar equity analysts estimate that a mid-cycle price for US natural gas of $4 per thousand cubic feet will be required to meet the more than 20 bcf/d of incremental consumption forecasted by 2020. The Marcellus is the single biggest driver in Morningstar's forecast, adding 11 bcf/d - about 50% of incremental volumes - through 2020.
- Increased gas consumption of 22 bcf/d by the end of the decade should provide a market for this abundant low-cost supply. This will be driven by power generation in the near term and pipeline and LNG exports in the longer term. Recent reforms in Mexico should boost that country's demand for gas, which is mainly supplied by pipelines from the US. LNG exports from the US are set to start in 2016.
- Given ongoing efficiency and productivity gains and the excess capacity that is expected to continue in the services market over the next several years, Morningstar believes that services prices will trough next year at 25% below their 2014 levels, with a gradual recovery as drilling and completion activity picks up.
- Morningstar says that while the next few years will be challenging for E&P companies and services firms, the analysts expect cash flow, profitability, and returns on capital will approach pre-crash levels by the end of the decade, with a recovery beginning in earnest in 2017.
GUILD INVESTMENT MANAGEMENT
Finally, I need to call your attention to our interview with Tony Danaher, president of Guild Investment Management, in this issue of OGFJ. Guild manages investments for both wealthy individuals and institutional investors.
Danaher said they always look for opportunities in oil and gas E&P, in downstream, in infrastructure, and in energy-related services and technologies. "We want to own investments for the longer term…We know markets get overdone on the upside and overdone on the downside. August 2015 in oil and gas looks like the latter."