Oil Stocks Jump

Posted on April 13, 2016 by Anthony Jerdine

Oil Stocks Jump on Promised Production Freeze
By Anthony Jerdine April 13, 2016

Shares of offshore driller SeaDrill Limited (SDRL) skyrocketed Tuesday, climbing almost 30% to a high of $3.99, fueled by a 4.5% rise in oil prices. This continues the tug-of-war between the bulls and bears the market has witnessed over the past couple of weeks.
Another Case of “Too Fast, Too Soon?”
On Tuesday the bulls sent oil prices higher on reports that Saudi Arabia and Russia have agreed to a production freeze ahead of the producers meeting in Doha, Qatar on Sunday. This was further driven by a Reuters report suggesting the government expects the U.S. crude output to decline by 560,000 barrels per day in 2017 to 8.04 million barrels per day.

“People are now realizing that this OPEC meeting could be a historic turning point for the market,” Phil Flynn, an analyst at Price Futures Group, told Reuters. “Now, with U.S. production cuts, our sense is that we’re entering a new cycle upwards.”

SDRL shares closed Tuesday at $3.83, rising 24.35%. The company makes money from drilling contracts, supplying drilling services for oil and gas wells. And as oil prices rise, it raises optimism about the company’s potential revenue in the quarters ahead. Not to mention, rising oil improves the prospects for more favorable drilling contracts. But is this another case of “too fast, too soon?”

As it now stands, U.S. oil prices are now at their 2016 highs and well above $40 per barrel – an important near-term psychological benchmark. On Tuesday, Crude oil (West Texas Intermediate) closed at $42.17 per barrel, while Brent crude closed up $1.86, or 4.3% at $44.69, according to CNBC.com. But as we’ve seen in recent weeks, oil can take a sudden negative turn.

Investors should remain vigilant, if not a bit skeptical, that a meeting between members of OPEC (Organization of Petroleum Exporting Countries) Sunday will result in a production freeze.

“The market appears to be taking a lot of support from positive statements. But, this isn’t the first time the Russians have come out and made remarks related to a production freeze being imminent,” said Gene McGillian, a senior analyst at Tradition Energy, according to CNBC.
Despite Tuesday’s massive rise in the share price, SDRL stock has suffered 64% declines over the past twelve months, compared to a 2% decline in the S&P 500 (SPX) index during that same span. Is now the best time to take some profits from SDRL shares? The stock has a consensus sell rating and an average analyst 12-month price target of $1.73, implying a decline of 55% from Tuesday’s close.

Oil Producers Not Alone in Downturn

Posted on March 31, 2016 by Anthony Jerdine

Oil Producers Not Alone in Downturn
By Anthony Jerdine | March 30, 2016

Much is written about the plight of shale oil producers stemming from the downturn in oil prices. Forty-two oil companies declared bankruptcy in the U.S. in 2015, according to Haynes and Boone, and management consulting companies like Deloitte predict much more will experience the same fate in 2016. (For more, see: 5 Energy Companies Crushed by Low Oil in 2016.) Oil producers are not the only ones suffering in the oil downturn. Many other sectors related to oil production are also facing challenges as the number of Exploration and Production (E&P) companies declaring bankruptcy grows.

Midstream Companies
Oil transportation companies, also known as midstream companies, are feeling the pressure of low oil prices. E&P companies, or upstream companies, are hoping to exit deals made with these midstream transportation companies as oil producers seek bankruptcy protection under Chapter 11 restructuring, reports Oil & Gas 360. It is an unusual move because these transport contracts are usually unbreakable and remain in place even after production is sold to a new owner post-bankruptcy. In this lower oil price environment; however, upstream companies that are burdened with high debt loads are seeking alternative ways to free themselves from other financial obligations to provide more flexibility during bankruptcy proceedings.

This is a real headache for midstream companies that negotiated transportation contracts when oil prices were significantly higher than they are today. Bankrupt E&P companies are no longer able to pay previously negotiated prices and are trying to cancel pipeline contracts to clear the way for possible acquisition deals. For example, Quicksilver Resources Inc. is seeking to cancel its pipeline transportation contract with Crestwood Midstream Partners LP(CEQP) by March 31 to close the sale of its U.S. assets to BlueStone Natural Resources for $245 million, Reuters reports.

In another deal, Sabine Oil & Gas filed a motion in court to cancel its midstream contracts. Sabine argued that it “could not deliver the required minimum amounts of gas and condensate and that rejection would save Sabine as much as $115 million,” according to the law firm Jones Day. Fitch Ratings, a credit rating agency, said in a press release related to Sabine Oil & Gas’s motion to cancel its contracts with the midstream service providers that “counterparty risks continue to be a concern for the midstream service space given expectations for continued E&P bankruptcy activity.”

Offshore Drillers
Another sector that is under a lot of pressure is the offshore drilling sector. Moody’s, another credit rating agency, says the offshore drilling industry is going through a severe cyclical downturn, and the agency expects day-rates to remain depressed over the next several years because of low producer spending and rig oversupply.

Paragon Offshore plc filed for bankruptcy on February 15, affecting $2.4 billion worth of debt, according to Moody’s. Paragon joins several other energy companies that have sought creditor protection amid the oil rout. Hercules Offshore Inc., the owner of the largest fleet of shallow-water drilling rigs in the Gulf of Mexico, said Feb. 11 that it’s exploring strategic alternatives — just three months after emerging from bankruptcy, Bloomberg reports.

At the end of February, Moody’s concluded rating reviews on six U.S. offshore drilling companies. Moody’s downgraded two companies’ ratings three notches, three companies’ ratings four notches and one company’s rating (Ensco plc) five notches to B1 from Baa2. The sharp downgrade reflects Moody’s view that Ensco’s leverage will increase to very high levels as more of its rigs roll off contracts in an extremely challenging offshore contract drilling market.

Multiple notch rating moves are rare for the rating agencies and are usually reserved for industries or companies under considerable financial strain.

Rig Contractors
Rig contractors have suffered the double blow of declining customer demand due to tumbling oil prices and a glut of vessels that continue to be built to meet orders made before the rout, Rigzone reports. Transocean Ltd. (RIG) leads the industry in reducing its fleet, with 24 rigs scrapped since the downturn began and it could retire another eight to ten over the next year to 18 months. In the meantime, Schlumberger (another oil industry service provider) said it’s not expecting a meaningful recovery in its own activity until next year.

Bank Loan Exposure
Debt has fuelled the shale boom, but as prices fell, companies that borrowed too much have started to find themselves under strain. This is also putting pressure on the banks that lent to these companies to fund the expansion. IMF economists warned in February that commodity price shocks could weaken banks in developing economies. It is not just regional banks in the US that are feeling the pain—big international banks have exposure to the oil sector too.

As an example, bankrupt Paragon Offshore mentioned earlier, has debt that includes $708 million due under a revolving credit agreement and $642 million due under a secured term loan, both organized by JPMorgan Chase Bank, Bloomberg reports. As a result, several major banks are reducing their exposure to the energy sector by attempting to sell off souring loans, declining to renew them or clamping down on the ability of oil and gas companies to tap credit lines for cash, the Wall Street Journal reports.
It is not just production companies that are hurting from the drop in oil prices. Everyone from businesses that sell ancillary services such as transportation to the banks that finance the industry is feeling the effects of low prices. If oil prices stay at depressed levels for an extended period, then the number of companies filing for bankruptcy is likely to rise and will extend beyond just the upstream producers.

Oil Price “May Have Bottomed Out”

Posted on March 14, 2016 by Anthony Jerdine

Oil Price “May Have Bottomed Out”: IEA
By Anthony Jerdine | March 14, 2016

The International Energy Agency released a mixed assessment of the crude oil market Friday, saying “there are signs that prices may have bottomed out,” but cautioning that the recent rally should not “be taken as a definitive sign that the worst is necessarily over” and that they “cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance.” Brent crude oil is trading up 1.6% at $40.70 Friday morning, having recovered from lows around $27 in January.

OPEC Stands Its Ground
The report said that global oil supplies fell by 180,000 barrels per day in February to 96.5 million b/d (mb/d). Output was still 1.8 mb/d above last February’s level, however, showing that oversupply remains a problem. The primary reason is the desire of OPEC, and especially the cartel’s leader Saudi Arabia, to maintain market share by driving higher-cost producers out of business.

The report showed signs that bid may be working. Since last February, non-OPEC production has fallen slightly, while OPEC production has risen. Compared to January, however, OPEC’s February output fell by 90,000 b/d to 31.61 mb/d. Saudi Arabia’s production, on the other hand, inched up from 10.21 mb/d to 10.23 mb/d. The report forecasts non-OPEC production to fall by 750,000 b/d to 57 mb/d in 2016.

OPEC and non-OPEC producers have been in sporadic talks about freezing oil production at January’s levels, which has provided the market with a level of confidence and encouraged the rally in prices. IEA’s report shows that, although talks have not been successful, production fell between January and February anyway. One reason is that supply in the OPEC countries Iraq, Nigeria and the UAE fell by a combined 350,000 b/d in February. There are also “signs that non-OPEC output is falling, the report says.”

Iran is the main sticking point in attempts by producers such as Russia, Venezuela, Saudi Arabia and Qatar to coordinate a production freeze or cut that includes OPEC and non-OPEC members. The country lost significant market share due to international sanctions, and is determined to gain it back, whatever the near-term effect on prices. Geopolitical tensions between Iran and Saudi Arabia have exacerbated the situation, as has the rise of fracking​ in the U.S.

Demand
The IEA left its forecast for 2016 global demand unchanged at 1.6 mb/d. It noted that “sharp decelerations” in the U.S. and China had driven demand growth down to 1.2 mb/d in the fourth quarter of last year, following a five-year high of 2.3 mb/d in the previous quarter. Commercial inventories in the OECD increased by 20.2 million barrels in January, while demand cover remained at a “comfortable” 32.7 days. The report also noted weak refinery throughput in the OECD.

The Bottom Line
IEA sees oil prices stabilizing in 2017, and says that they may already have bottomed out. Ironically enough, closely-watched talk of a coordinated production freeze in February came to nothing, but production ending up falling slightly over the month anyway. For now, the standoff between OPEC producers, led by Saudi Arabia, and non-OPEC producers continues. In addition, the standoff between Iran and Saudi Arabia has fractured the cartel itself. Still, prices have already recovered by over 50% from January lows, so it’s possible – but not guaranteed – that the worst is indeed behind us.

Oil Price “May Have Bottomed Out”