Sterne Agee CRT analyst, Tim Rezvan, spent much of last week in Houston and Dallas meeting with companies and clients in the E&P sector. Takeaways were grim for the companies in the sector but cutbacks could be helpful to the underlying commodity price. That said, the analyst said they expect WTI and Brent to retreat back to $30/bbl in the near term. They remain cautious.
Key takeaways from the trip are as follows:
1) all companies/investors the firm spoke with expect to see a higher oil by y/e 2016, and a subsequently higher price by y/e 2017, given the sharp decrease in capital spending since late ’14,
2) more operators are citing a shortage of pressure-pumping capacity across the industry as a real concern in ’17 that may exacerbate a future rally in oil prices, and
3) operators continue to see efficiencies and lower well costs driving down cost structures.
On this, the analyst said:
“With that backdrop, we expect an aimless, range-bound market for E&P equities to persist through 1Q earnings. Greenshoots for a rally are emerging, but near-term data points reinforce our caution.”
The analyst believes hope is (still) not a near-term investment thesis and they have little optimism we will see a materially bullish event emerge out of the Doha meetings planned for April 17. They believe we could see WTI and Brent retreat back to $30/b in the near term. They would argue this final capitulation would force U.S. producers to adhere to their lower spending/production forecasts, and could an important driver that brings global oil markets back into equilibrium in 2017. This dynamic reinforces their current WTI price deck of $40/b in ’16 and $49/b in ’17.
They believe there will be a time later this year when adding oil exposure will be prudent for long-only investors, but they do not believe that moment is today.
With WTI crude prices up 51% since early February, Macquarie Capital’s Vikas Dwivedi is calling for a short term correction back to the back to mid-$30 to low $30 range.
Dwivedi sees several short term factors impacting the price:
Continue reading “Crude Could Fall Back to $30s Short Term”
Oh that pesky dollar… With tough talk out of fed heads this week, that they could be raising rates again as soon as April, the dollar is higher for the fifth consecutive day against a basket of major currencies.
Dollar strength is impacting oil, gold and other commodities as well as the broader equity market.
The implied probability of a rate hike at the Fed’s April 27th meeting jumped to 13.9% from 11.5% the prior day, according to the CME Group’s FedWatch tool. It was at just 1.9% last month.
Low oil prices have added two more victims today in two separate industries today.
- Quantum Fuel Systems Technologies Worldwide, Inc. (NASDAQ: QTWW) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Central District of California. Quantum Fuel Systems was spun-off from IMPCO Technologies in 2002. The company is a leader in the innovation, development and production of natural gas fuel storage systems and the integration of vehicle system technologies including engine and vehicle control systems and drivetrains. Needless to say but there is probably not too much demand for alternative fuel sources with gasoline at below $2 per gallon nationally.
- Emerald Oil, Inc. (NYSE: EOX) announced that the Company and its subsidiaries filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware. Commenting on the bankruptcy the company said:
“Like many other exploration and production companies, Emerald’s operations have been significantly impacted by the dramatic decline in oil prices, the continued low prices of oil and natural gas, and the general uncertainty in the energy markets. These macro-economic factors, coupled with Emerald’s substantial debt obligations, resulted in the Company’s decision to explore strategic restructuring alternatives to reduce its debt and achieve a sustainable capital structure. Over the last nine months the Company explored and presented multiple solutions to its lenders to solve the Company’s current financial condition, however the Company was unable to obtain the requisite lender consent. Emerald continues to evaluate and discuss alternatives with its stakeholders and believes that an in-court sale process will maximize value and position Emerald for future profitability.”
While oil prices have recovered sharply off their lows, E&P spending continues to be gutted.
A new survey from Barclays showed that about 70% of companies changed or introduced new budgets with global E&P spend to be down 27% year-over-year.
They note this is the first time since 1986/87 upstream investment has fallen for two years in a row.
Further, they note that absolute spend is down 44% from 2014 levels.
North America spend is now trending down 40% (vs. -27% in January) and International spend is now trending down 21% (vs. -11% in January).