Russian oil production faces long term decline, Bad energy debt soon to exceed 50%
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25/03/2016
 

Despite High Debt Levels Energy Investors Remain Undaunted

 
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Oil prices retreated from their multi-month highs this week, as bullish data seemed to be in short supply, replaced by several gloomy figures from the EIA. U.S. inventory levels surged once again this week by 9.3 million barrels, hitting a new record of 532 million barrels. Production continues to inch down, but the U.S. is importing more oil, which is diverting some production into storage. Oil prices fell below $40, but steadied during Friday’s early trading hours.



















Bad energy debt to exceed good energy debt. The number of
energy loans that are in danger of default could jump above 50 percent this year, according to The Wall Street Journal, presenting some problems for several major banks. Lenders are starting to back away from new loans, declining to renew credit, and selling off bad debt. That could slash the available credit lines for some struggling oil and gas producers this year, potentially raising some liquidity pressure on E&P companies. An estimated 51 oil and gas companies have fallen into bankruptcy since early 2015. The periodic credit redetermination period is coming up, which could result in credit lines offered to energy companies being reduced by 20 to 30 percent. The total debt in the entire oil and gas sector hit $3 trillion in 2014, or about three times higher than 2006 levels.

Oil industry still able to access capital. Despite posting record losses in potentially seeing credit lines cut, several oil companies have returned to the equity markets, where they are still being welcomed with open arms. Reuters reports that at least 15 oil companies have announced
new offerings in 2016, with minimal damage to their share prices. The companies surveyed have outperformed an oil and producers index by 3 percent on average. 

But another way of looking at that statistic is that only well-positioned companies have issued new stock. Companies like Pioneer Natural Resources (NYSE: PXD), Callon Petroleum Co (NYSE: CPE), and Oasis Petroleum (NYSE: OAS) have performed better than some of their peers since announcing new stock offerings. Shareholders seem willing to provide companies with new cash infusions. “People would rather they have money in their pocket and survive,” Irene Haas, analyst at Wunderlich Securities, told Reuters. “They’ll worry about dilution later.” U.S. oil and gas exploration companies have issued a combined $10 billion in new equity this year. 

ExxonMobil (NYSE: XOM) looks at stake in Mozambique natural gas. The WSJ reports that ExxonMobil is on the verge of purchasing a stake in a large offshore natural gas project in Mozambique from Italian oil company Eni (NYSE: E). While the details are unconfirmed, the WSJ says that Exxon could take a 20 percent stake in the project. In 2013, before the market crash, such a stake would have been at $4 billion. The project is an important one, an offshore field that could turn Mozambique and East Africa into a significant LNG exporter. The deal could be evidence that some of the largest oil companies are on the hunt for bargains while they can get them. It would also allow Exxon to grow its reserve base through acquisition. 

SEC rules Exxon must offer climate resolution to shareholders. The SEC
ruled that the oil major must offer a resolution to shareholders during its annual proxy, a vote that would require Exxon to provide much more detailed information about its risks to climate change and/or its risks to legislation and regulation intended to cut greenhouse gas emissions. In the wake of the Paris climate agreement, any added costs through taxes or stringent limits on oil and gas production would reduce long-term shareholder value, something that the SEC argues shareholders have a right to know. 

Russia could face long gradual decline in oil. Russia’s oil output hit a post-Soviet record of 10.9 mb/d in January 2016, but that could be a
ceiling as the country’s massive oil fields face decline. The bulk of Russia’s oil output comes from its aging West Siberian fields, which require ever more investment just to keep output stable. The depreciation of the ruble has helped a bit, lowering the real cost of spending on production and allowing Russian companies to increase investment by one-third this year. However, some long-term projects are being pushed off due to the financial squeeze from western sanctions and low oil prices. An estimated 29 projects, amounting to 500,000 barrels per day in new production, have been delayed. With most of Russia’s large oil fields having been under production since the Soviet era, and with precious few new sources of supply, Russia is facing long-term decline. 

Investment in renewable energy twice as high as global coal and gas investment. Renewable energy still makes up a small fraction of electricity generation worldwide, but the trend is in favor of solar and wind. Global investment in renewable energy in 2015 was
twice as high as investment in new coal and natural gas power plants. And that figure included the developing world. China alone accounted for one-third of the $286 billion invested in clean energy last year. 

Rig count resumes decline. The rig count fell once again, after taking a one-week pause last week. Baker Hughes
reported its figures one day earlier than usual, revealing that the U.S. rig count fell by another 12 for the week ending on March 24 (-15 oil rigs, +3 gas rigs). The data shows that the oil patch is not done shedding rigs, despite the recent hiatus. 

U.S. gives OK to offshore wind. The Bureau of Ocean Energy Management gave the
greenlight to a small plan by Dominion Resources to install offshore wind turbines off the coast of Virginia. The plan would only involve a 6 megawatt project, but the state hopes it would demonstrate offshore wind’s potential. The U.S., with no offshore wind installations to date, lags far behind Europe. 

ISIS is reeling. Despite the high-profile attacks in Brussels this week, The Washington Post
reports that ISIS is quickly losing strength. The militant group has not won any key battles in months, top leaders are increasing being taken out by airstrikes, and fighters routinely flee the battle field when confronted. In a story that is still developing, NBC News reported on March 25 that ISIS’ second in command was killed this month in a raid. The American and European public may be struck with fear after a string of attacks in France and Belgium, but ISIS is rapidly losing territory, finances, and strength in Iraq and Syria.  

In our Numbers Report, we take a look at some of the most important metrics and indicators in the world of energy from the past week. Find out more by
clicking here. 

Thanks for reading and we’ll see you next week.

Best Regards,

Evan Kelly

Editor, Oilprice.com

P.S. – Veteran trader Matin Tillier analyzes coal stocks this week, attempting to find value in an industry that appears to be in terminal decline. Find out why not all coal stocks need to be shorted in the current market by starting your 30 day risk free trial on
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Who To Back When Oil Rebounds

In my book Shale Boom, Shale Bust, I isolated three places one could reasonably invest for the long term to bet on the (I believe) inevitable boom cycle in oil that will reemerge in 2017. The first, the E+P ‘survivors’ of the long cheap oil ‘winter’, I’ve talked about almost exclusively and at length.  The second, infrastructure and services, hasn’t yet fully revalued for the huge production shifts and decreases to come – and therefore remains an investment for the future. 

Finally, there are the ‘vultures’ – Those cash-rich companies and private equity groups that can pick off the assets of the distressed, debt-laden producers being forced to delever.  In my book, I mentioned two likely candidates for this:  Exxon-Mobil (XOM), a possible buyer of a big shale player and Blackstone (BX), one of several PE firms who have established big independent funds that will concentrate on distressed energy assets.

But what if a true oil ‘landsman’ - who had already built a great shale company - wanted to reemerge at this moment in the bust cycle to build another company from scratch? This is precisely what Mark Papa, the ex-CEO of EOG Resources (EOG), is intending to do with his SPAC: Silver Run Acquisitions (SRAQU).  I believe it represents a great long-term opportunity. 

Recently, I was deeply considering the idea of a managing a focused energy fund.  What an incredible advantage, I thought, to be able to start a fund today at zero by buying stocks and bonds when they are at their most distressed point.  I ultimately decided not to take on this challenge, but the position Mark Papa is in today is precisely the same.  Silver Run has amassed $450m (an over subscription of $50m) to allow Papa to go wherever he wants and pick out his choice of depressed shale assets with which to build his new company.  

His is hardly the first focused vehicle to attempt this.  The tragically departed Aubrey McClendon floated a $1B SPAC in early 2015 to buy shale assets for American Energy Partners – but that attempt ended in failure as McClendon only managed to raise $11m of the planned $1B in units.  That Mark Papa has, in contrast, oversubscribed so easily for his nearly half a billion fund says a lot for the confidence the market has in him – and my confidence in him as well. 

It’s not as if the market is awash in superb shale assets selling at bargain basement prices right now, nor is there zero competition for the best acreage that is available. As I mentioned, Blackstone is one of more than half a dozen PE firms to have set up dedicated funds for energy assets, and all of them are hungrily waiting for distressed companies to start to offer out some of their better stuff.  But I believe that Mark Papa has an advantage over many of them, not only because of his land knowledge – acquired while he was at EOG – but because of his personal relationship with the other ‘landsmen’ at the other companies.  

They know Mark Papa – and trust him.  They’ll likely be more inclined to talk to him first about whatever assets they are thinking of putting on the block.  

For these reasons, I’ve begun to buy units of Silver Run.  Right now, they’re trading for a 3-4 percent premium over their initial offer price, which I consider a reasonable premium to pay – for the expertise of a true shale ‘guru’ getting back into the game. 
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