UPSTREAM NEWS

June 10, 2016
9 min read

2016 bankruptcies represent $34.7B in debt

In May, Roth Capital Partners spoke with Haynes & Boone for an update on bankruptcies in the oilpatch for a May 23 E&P update. According to Haynes and Boone, 77 North American oil and gas producers have filed for bankruptcy since the beginning of 2015. These bankruptcies involve approximately $51.9 billion in cumulative secured and unsecured debt. As of May 16, 2016, 35 producers have filed bankruptcy so far in 2016, representing approximately $34.7 billion in cumulative secured and unsecured debt.

Moody's: Canadian wildfires cause major damage and oil production cuts, but no credit impact

While the severe ongoing Canadian wildfires will be economically devastating for the Fort McMurray region and the Province of Alberta (Aa1 negative), the credit impact will be minimal for the province, and for insurers, pipelines, utilities and oil and gas producers affected by the disaster, said Moody's Investors Service in its May 6 sector comment.

The fires will hurt Alberta's fiscal and economic standing in a year when the province has already projected a CAD10.4 billion (25.2% of Alberta revenue, USD8 billion) deficit for 2016-17, and will likely exceed the fiscal impact of Alberta's 2013 floods. The fires, which began in early May, had destroyed 1,600 buildings as of 5 May, and led to the complete evacuation of Fort McMurray, displacing about 90,000 people.

Early estimates of the wildfires peg the cost of damages rising to CAD5 billion, or around 1.5% of Alberta's GDP-an estimate that could increase. Alberta's economic growth is likely to slow temporarily as the fires reduce oil production-mainly in the second quarter of 2016, but with some impacts still spilling into the third quarter. Rebuilding activity that typically follows natural disasters will help boost Alberta's economy in the future.

The cost of the disaster relief will materially surpass the CAD200 million that Alberta sets aside for each of the next three years in unallocated disaster and emergency assistance. We anticipate that the province will receive federal subsidies under Canada's Disaster Financial Assistance Arrangements program, which assists provincial and territorial governments in large-scale natural disasters. Under the current program, Alberta will be eligible to receive tiered compensation of up to 90% of eligible spending exceeding CAD3 per capita. However, it may take up to years for the province to receive the federal assistance, with exact amounts and timing to be determined through negotiations.

The Fort McMurray fires had destroyed four times as many buildings as the Slave Lake wildfire of May 2011, which cost Canadian property and casualty (P&C) insurers over CAD700 million in pretax losses. The magnitude of the current destruction suggest that the new fires will generate among the largest catastrophe losses in Canadian history, affecting both personal and commercial property writers. But once insurers tally final losses, the catastrophe will not likely be a major capital or credit event for the Canadian P&C industry, although it will hurt second-quarter 2016 earnings for insurers and third-quarter 2016 earnings for TD Bank (Aa1 negative).

In addition, we believe reinsurance will cover some of these direct losses, since they will likely exceed retention limits under reinsurance programs. Companies will experience both personal and commercial property losses, since the Fort McMurray fires have destroyed both homes and businesses. TD Bank, Desjardins Group (Aa2 negative) and Intact Financial Corporation (A1 positive) could have personal-property exposures, while Intact, AIG Insurance Company of Canada (A2 stable) and Northbridge General Insurance (A3 stable) could have commercial exposures. We note that an insurer's exposure can differ from the premiums written depending on a company's market share in the affected areas.

While not directly affected by the fires, producers in Canada's oil sands have shut down operations at numerous facilities in the Fort McMurray region, including Royal Dutch Shell Plc (Aa2 negative); Nexen Energy ULC, a subsidiary CNOOC Limited (Aa3 negative); Suncor Energy Inc (Baa1 stable); Husky Energy (Baa2 stable); ConocoPhillips (Baa2 negative); and Syncrude (unrated). All have shut down or scaled back production to allow their largely Fort McMurray-area employees and their families to get to safety. No facilities are currently in danger of being consumed by the fire.

Alberta's oil production has fallen by 700,000-1,000,000 barrels per day (bpd)-almost 25% of Canada's total oil production. While this is a significant production cut, we expect the outages to be temporary, with no ratings impact on the producers. Their postfire challenge will be to staff up facilities, since many of their employees will have been displaced, and any significant damage to power infrastructure could limit production for a longer period. Despite the challenges, we believe producers will be able to re-start production in a timely manner, with minimal impact to credit quality.

Shell's shutdown of operations at its Albian Sands oil sands project has led Inter Pipeline (Corridor) Ltd. (A2 stable) to shut down its Corridor pipeline system, which transports Albian oil to the Scotford Upgrader near Fort Saskatchewan. The pipeline will likely restart only when Albian production restarts. Despite the temporary pipeline shutdown, we expect no effect on Inter Pipeline's cash flows and credit quality, since shippers' payment obligations under the Firm Service Agreement do not depend on actual volumes or the availability of the pipeline.

The Fort McMurray fire has affected some oil pipeline and storage assets for Enbridge (Baa2 stable) and its subsidiaries, but so far there are no indications of damage to its facilities in the Fort McMurray area. Enbridge has shut down some of the assets either as a precaution or because they serve production assets that have shut down. Lower oil sands production will lead to reduced volumes on some of Enbridge's regional pipeline systems, however these pipelines have limited volume risk. The "mainline" operates on a fee-for-service basis and has volume risk. However, it is generally oversubscribed, and a near-term drawdown of inventories will at least ease if not offset any short-term reductions in production volumes. A timely re-start to production will limit any credit implications for Enbridge or its subsidiaries.

TransCanada Pipelines Limited's (A3 stable) long-term take-or-pay contracts underpin its base Keystone system with about 545,000 bpd of total 590,000 bpd capacity. While spot volumes on the system may decline because of lower production, the take-or-pay contracts will likely continue to generate stable cash flow for TransCanada. The fires so far have not approached TransCanada's aboveground natural gas pipeline assets in the Fort McMurray region.

DW: Movement in the Middle East

The Middle East has been a relative bright spot for upstream activity during the oil price downturn, Douglas-Westwood said in its May 16 edition of DW Monday. International land rig contractors, such as Saipem, are actively focusing their strategy and drilling campaigns on the region in the attempt to limit the negative impact of low oil prices.

Looking at drilling activity, it is clear why the Middle East is a good prospect for contractors hit by the falling rig count. Between 2014 and 2015, Douglas-Westwood's Drilling & Production Market Forecast saw global onshore wells drilled fall by a staggering 32% as operators slashed drilling campaigns. The Middle East - characterized by low lifting costs and containing almost half of the OPEC membership - was relatively immune from this decline, growing at 3%. Douglas-Westwood expects the Middle East to continue to buck global trends, anticipating another 3% increase in the number of onshore wells drilled this year.

Despite this growth, the region has not been completely exempt from the impact of the downturn - NOCs such as Saudi Aramco have slowed progress at a number of projects. Indeed beyond drilling & production, heavily commodity dependent Gulf producers have felt the strain on their finances. Non-OPEC member Oman has been hit particularly hard, with both Moody's and Standard & Poor lowering their credit rating - the latter to just one notch above junk status.

However, a regional reliance on oil exports is expected to support continued activity and there are clear bright spots within the region. Since economic sanctions were lifted in January, Iran has stood out as a potential golden opportunity for international rig contractors - Douglas-Westwood's Iran Oil & Gas Market Forecast expects demand for land rigs to increase at 6% to 2020. However, some bilateral US sanctions remain. This has created uncertainty with regards to payment - understandably a key concern for any potential entrant. This may restrict US based contractors from entering the market directly, therefore, the opportunity - at least in the short term - is likely to be most accessible to indigenous contractors based in the Middle East. As a result, it may be contractors in neighboring markets that find themselves with an early mover advantage.

Kosmos Energy finds more deepwater gas offshore Senegal

Kosmos Energy has made a gas discovery in its Teranga-1 exploration well offshore Senegal. Located in the Cayar Offshore Profond block approximately 40 miles northwest of Dakar in nearly 5,906 feet of water, the Teranga-1 well was drilled to a total depth of 14,715 feet.

The well encountered 102 feet of net gas pay in good-quality reservoir in the Lower Cenomanian objective. Well results confirm that a prolific inboard gas fairway extends approximately 124 miles from the Marsouin-1 well in Mauritania through the Greater Tortue area on the maritime boundary to the Teranga-1 well in Senegal.

Kosmos has now drilled five consecutive successful exploration and appraisal wells in this fairway with a 100% success rate.

In the process, the company has discovered a gross Pmean resource of approximately 25 tcf and estimates the fairway may hold more than 50 tcf of resource potential.

Conventional discoveries outside North America continue decline

Volumes for conventional oil and gas discoveries made outside of North America have continued their multi-year decline, said IHS. Just 12 billion barrels of oil equivalent estimated recoverable resources were discovered in 2015, a record low since 1952, when discoveries reached just 7.8 boe, IHS analysis shows.

Further, said IHS, North American tight oil alone cannot cover future supply gap - conventional exploration will need to resume.

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