Energy industry tidbits

AS I PEN THIS COLUMN, holiday celebrations are on the horizon. As the issue hits desks, the festivities will be in full swing. Among the joys of the holidays is the dizzying array of culinary options made available at every turn. Ever departed a holiday gathering feeling peckish? Nor have I.

I've mentioned my email inbox in a previous column. It's full of tidbits from experts, analysts, and thought-leaders. And while certain snippets may not appeal to everyone, the beauty of the smorgasbord is that there's something for everyone. With that as a backdrop, I devote this column to information tidbits from recent days. I hope you find something you like.

In a late November update, Raymond James analysts circled back to November 2014 and OPEC's decision to, as they put it, "no longer defend a price floor." While more upbeat on oil prices (on a 6-12-month basis) going into 2016, the analysts said, "$40-oil in November 2015 has a direct relationship with the events of that unfortunate weekend a year ago."

Another morsel from that same update was a look at rig counts. As of this writing, the total US rig count was 757 rigs, down from the 2014 peak of 1,931 rigs, Raymond James said, detailing that since that peak, "the Hz US rig count has shrunk by 745 rigs (or 55%), with 99% of the decline (or 734 rigs) occurring since the beginning of the year. The oil directed rig count is now down 1,045 rigs from its September 2014 peak of 1,609. By comparison, the gas directed rig count is now down 163 rigs from its peak of 356 rigs."

In a post-earnings season recap in late November, Wunderlich Securities Inc. analysts described E&Ps as "moving slowly" given current commodity prices. "Following a month-long vacation for E&Ps and the OFS players, we think that 2016 will start slow with a January hangover effect as E&Ps remain careful and guarded with their spending plans. This might result in more serious US production declines that the market has been waiting to see, and could possibly allow the US to begin working off its significant inventory of oil and natural gas," they said.

If/when commodity prices show signs of improvement, expect E&Ps to benefit first, followed by the oilfield services companies. "While we are not expecting prices to recover overnight by any means, we think that when oil and natural gas prices begin to move higher, most E&Ps will use the additional funds to repair their balance sheets rather than add activity. This lag will likely cause the oversupply in the OFS space to continue even as commodity prices improve. As a result, we believe that E&P valuations may recover/improve before the OFS names, which is a reversal of the historical trends in a recovery," the analysts continued.

Deutsche Bank spoke at a Platts conference in Houston in November, and following the event, shared takeaways on relevant industry-wide trends. Catching the bank's attention, they noted, was the talk of private equity capital waiting to be deployed. This year alone, even in the down market, $35 billion has been raised by 19 funds. Thirty-six funds were out raising money at the time the event took place. Eight of those 36 are new entrants, double the number that raised $8 billion in 2014, Deutsche Bank noted. "The overall trend is that large funds continue to grow. And while we think valuations at the parent level look compelling, asset-level prices appear difficult due to this PE bid. Further, many participants noted the difficulties of midstream on a small scale-2-3 gathering systems is not competitive, while 2-3 upstream assets can lead to good returns," they detailed.

Noting the increasing importance of US production and E&P budgets to its 2016 midstream outlook, Deutsche Bank relayed remarks from a call hosted November 19 with Genscape. Genscape's Hillary Stevenson "framed up US production as peaking in April/May near 9.6 MMb/d and falling to 9.3 MMb/d at year-end. She contrasted this with the sharp drop (~67%) in rig counts and suggested drilling efficiency gains are likely to hold. In this environment, she expects the Permian to be resilient and the Bakken to be moderately supported by termed-up rail, while the Eagle Ford, Mid-Con, and Rockies drop/stay low," the bank relayed. Further, according to Genscape estimates, US storage is 60-65% full with Cushing close to 2001, 2009, and April 2015 highs. "Finally, with refinery runs already above-average due to deferred maintenance, higher utilization is unlikely to fix the glut, leading to Stevenson's WTI forecast: sub-$50 this year and still under $60 through all of 2016," said the bank.

In a post-view following a mid-November conference, Jefferies analysts described a "fairly bearish" sentiment across energy sub-sectors, but said they believes energy equity performance "is likely to be constrained by the already strong QTD up-move and short-term concerns around 2016 oil demand growth, deep external funding challenges and challenges in funding cash payouts."

Oily equity sentiment was slightly negative, they noted, as "investors clearly do not believe that large and small producers can keep 2016 volumes flat (we would agree) given weak cash flow generation, growing debt loads, limited external finance opportunities and large dividend burdens."

And finally, Jefferies noted, was the talk by E&Ps and oilfield service companies pointing to early 2016 activity on 'fresh budgets.' Jefferies analysts are skeptical. "Rising budgets seem unrealistic to us. 2016 curves are at very low levels, hedges are rolling off and bank credit is tightening."

Here's to delightful options in 2016. Cheers.